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Transfer Values Rise

One of the side effects of the fall in long-term interest rates following the Brexit vote has been a widening of the deficits faced by private sector final salary pension schemes. Their liabilities are valued using long-term interest rates and, as these drop, so the liabilities rise. Even if the corresponding value of scheme assets rose at the same pace, the gap between the two would widen because most schemes are already in deficit. One widely quoted yardstick of private sector defined benefit scheme deficits put the shortfall at over£400bn in July 2016.

And the corollary…

The rise in liabilities has meant that many schemes have also increased the transfer values they offer. With liabilities seemingly on a relentless upward path, there is an obvious incentive for schemes to encourage their members to head for the exit. The result has been some numbers that at first sight look rather odd.

The HMRC basis for valuing a defined benefit pension for lifetime allowance testing purposes was set over a decade ago at a rough-and-ready 20:1 – £1 of pension is deemed worth £20 of benefit value. However, there are now reports that some transfer values for people close to retirement are coming out at 30 times or more their prospective pension. That would mean a pension of a little over £3,000 a year could equate to a transfer value of £100,000.

Time to review?

If you have benefits in a private sector final salary scheme, the starting point for any advice has traditionally been that you should not transfer. While this remains true today, the much greater transfer values on offer and the opportunities presented by pension flexibility have made moving from the default “stay-put” option more attractive. For example, a transfer could mean a significant increase in the tax-free lump sum available, better death benefits and the ability to adjust your level of income as circumstances change.

Action

If you have private sector pension benefits from a previous employment or a closed scheme of your current employer, it may well be worth examining your transfer options. This is the case even if they were reviewed only a year or so ago because of the recent increases in transfer values that have taken place.

As a first step, ask us to undertake an initial review of your old pension benefits and recommend where a more detailed analysis is appropriate.

Past performance is not a reliable guide to the future. The value of investments and the income from them can go down as well as up. The value of tax reliefs depend upon individual circumstances and tax rules may change. The FSA does not regulate tax advice. This newsletter is provided strictly for general consideration only and is based on our understanding of law and HM Revenue & Customs practice as at January 2011 and the contents of the 2010 Comprehensive Spending Review. No action must be taken or refrained from based on its contents alone. Accordingly no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction.