Why final salary pension values have soared during the lockdown and what to do about it
The average transfer value of final salary pension schemes rose to £556,000 in the second quarter of 2020 according to an analysis by the pension consultants Lane Clark & Peacock. This represents an increase of 30% in the previous quarter. It is the first time in three years that the average transfer value has exceeded half a million pounds.
Although the average transfer value increased substantially the overall level of transfer activity fell by 25%. There are many reasons for this not least of which has been the delay in obtaining transfer quotations during the lockdown.
Curiously people with smaller pensions were the least likely to transfer their pensions due to the stock market crash in February/March. On the other hand, those people with large pension pots were more likely to transfer because they are generally better financially educated so they understand the benefit of investing in shares when prices are low. People who transferred in late March/early April not only benefited from large increases in transfer values but also the rally in world stock markets which has been very strong especially in the US.
The reduction in the base rate from 0.75% to 0.1% was a major reason for the increase in transfer values because it led to yields on government stocks falling to a record low level. This is significant because when the yield on government stocks falls, the transfer value of final salary pension schemes increases. So in other words it has a seesaw effect. The reason this happens is because the yield on government stocks is used to calculate transfer values. The lower the better for transferees.
According to LCP, the current level of transfer value quotes is back up to 75% of pre-lockdown levels. However, the forthcoming ban on contingent charging from 1 October by the FCA is highly likely to see an exodus of financial advisers advising on final salary pension schemes. It is very likely to lead to less members being able to get the right advice.
There is, however, a ray of hope for those individuals who would like to take advice on their final salary pension schemes. As long as the advice process has started before 1 October their advisers may complete the advice under the existing rules and complete the transfer after the deadline date.
This remains an opportunity for savvy final salary pension scheme members who recognise this as a one-off chance to benefit from both a high transfer value and a soaring stock market. The problem is, it is a double-edged sword. Transfer values could rise even more if the government introduces a negative base rate. However, world stock markets, especially the US one, have risen to irrational highs which make it increasingly likely that a further, more severe global stock market crash could very well happen. If that were to happen after a final salary pension transfer then the gain from a higher transfer value could be more than wiped out by a subsequent stock market fall. That, does of course, pre-suppose that you would invest 100% of your pension transfer into equities. Of course, this isn’t necessary. There is no reason why you couldn’t invest the money cautiously initially, wait for the next stock market decline, then drip-feed investment into shares. That would be the sensible choice in my opinion.
The choice, of course, is yours. If you have a large final salary pension scheme and you tick many of the following boxes you are more likely than not to benefit from at least having your final salary pension scheme reviewed, if not transferred.
- A medium to high attitude to investment risk.
- You accept that prices rise and fall and you may not get back all of the money you have invested.
- An understanding that higher risk means potentially greater reward as well as a greater risk of loss.
- You already have sufficient wealth and guaranteed retirement income to cover your cost of living which means you are not reliant on your final salary pension.
- A large transfer value (assumed to be at least 25 times the accrued pension to date and ideally 30 times or more) of £500,000 or more.
- Married with children (and even grandchildren).
- Reduced life expectancy e.g. a terminal illness.
- A desire to retire early (ideally 5-10 years before the normal retirement age of the scheme) and the final salary pension scheme has a high penalty for early retirement such as a 6% a year actuarial reduction in pension benefits for each year of early retirement.
- A wish for pensions flexibility for both income and tax-free cash.
- A distrust in your pension scheme’s ability to pay the full pension you are forecast to receive especially if your pension scheme has a large deficit and could be taken over by the Pension Protection Fund.
- You do not want your pension to die with you and your spouse (if you have one).
- You accept that in theory at least you could potentially deplete all of the cash from your pension after it has been transferred.
- You wish to extract your pension benefits in the most tax-efficient manner possible.
- You want control of your own pension rather than leaving it with your ex-employer to manage.
- You feel very strongly that it is your money and you have the absolute right to manage it yourself as you see fit.
The above list is not an exhaustive one but it does indicate the factors that are most likely to lead to you deciding to get your final salary pension scheme reviewed. If you fulfil much of the criteria why not ask for a review from qualified pensions experts such as us? You know it makes sense.*
* The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs’ practice. Levels and bases of tax relief are subject to change.