The video was prompted by news articles today suggesting that cash equivalent transfer values (CETV) of defined benefit pension schemes such as Final Salary or Career Average Salary schemes and other guaranteed/deferred annuity pension schemes have fallen back to 2016 levels after hitting highs in 2020-2021.
It was also prompted by a new enquiry from a prospective client insisting that they wanted to give up their defined benefit scheme and transfer out to an investment linked pension as the CETV had fallen and he was blaming the recent stock market falls for this.
Watch our video on How a Transfer Value is Calculated Calc CETV
Why have Transfer Values Fallen?
The answer is simple, interest rates have increased or more accurately ‘government borrowing’ interest rates i.e., gilt yields have increased.
When a pension trustee guarantees your pension income for life, it quite literally lends money to the government, that borrows £billions every year, for a fixed or inflation linked rate of return. This means the pension scheme has a guaranteed income from the government to enable them to offer you your guaranteed pension income. Whn you die or when the Treasury Stock matures (usually 15, 20 or 30 years), the original loan is repaid by the government i.e., the pension scheme gets its capital back.
Think like a banker:
You need a guaranteed income/interest of £100 pa and your capital secure.
It is the same for pensions.