Why Defined Benefit Transfer Values Are So Large

Why Defined Benefit Transfer Values Are So Large At Present.

Cash Equivalent Transfer (CETV) values are extremely high at present. The questions are: Why?  Will they remain high?

Why are they high?

Annuity rates are at an all-time low due to low interest rates, low gilt yields and longer life expectancy.  Even for the last 3 month, the Annuity Interest Rate (AIR) used by pension and investment companies to conduct a transfer value analysis has been set at 2.1%pa.  What this means is that if you are entitled to a defined benefit pension scheme of say £10,000pa, the comparative cost to buy that level of income at a rate of 2.1% would be £476,190 (£476,190 X 2.1% = £10,000 pa).  

When annuity rates (linked to interest rates and gilt yields) are higher e.g. Aug 2012 at 3.1%, the cost to buy a pension of £10,000 pa would be £322,580 (£322,580 X 3.1% = £10,000pa).

Will transfer values remain high?

As we approach the UK/EU Brexit vote, concerns mount for the UK economy and as a result the £ is weakening against other currencies.  The impact of this is the British Government may have to pay more to borrow money i.e. Gilt interest rate yield % will have to rise.  Looking at the above example, if the Government needed to offer say 3.1% when borrowing, then the impact on your annuity rate and therefore your CETV would mean it falling dramatically.

Should I transfer my defined benefit pension?

Whilst this is not advisable for most people given the guaranteed income and lack of investment risk in your defined benefit pension, the risk of transfer values falling present an interesting dilemma for single people that have these schemes i.e. will not benefit from the spouses pension or those that have shorter life expectancy, it may be worthwhile seeking advice now on a potential pension transfer to take advantage of higher values and improved death benefits for  private pension scheme.