Interest rates are rising. What will this mean for your CETV?
October 14, 2022
By Jessica Cook
What’s been happening to pension transfer values in 2022?
If you are considering a pension transfer and are wondering how recent economic changes may impact your final salary pension’s cash equivalent transfer value, read on!
Rising inflation and rising longer-term gilt yields from historic lows are a perfect storm for the decline of transfer values.
The ultra-low interest rates fuelling soaring UK transfer values over the past few years are no more. After sitting at around 0.1% for most of 2021, the Bank of England has conducted several Interest rate rises. And at the time of writing (Oct 2022), it now stands at 2.25%, And there’s talk of yet further rate rises in an attempt to combat the rampant rate of inflation.
But what effect does this have on final salary pensions and the transfer values (CETVs) of defined benefit schemes?
Interest rates, of course, are not the only factor that can affect the value of your CETV, but they’re nevertheless very important if you’re thinking about transferring your pension, That’s because interest rates affect bond yields, and bond yields affect how much money you’ll receive if you decide to transfer. When interest rates rise bond yields tend to go up and this has a negative impact on CETVs.
We are now in a world where gilt yields have risen steeply and are rising, and those who are requesting transfer values now, are seeing declines of up to 25 per cent from previous values.
It is important to remember that if your CETV has fallen, it’s only your transfer value that has fallen; the value of your pension hasn’t fallen. The annual amount you will receive on your retirement date will remain the same, and In fact, your annual pension will be adjusted for inflation.
Although even an ‘inflation-proofed’ scheme is not necessarily going to keep pace with the cost of living, The truth is, that most schemes put a cap on inflationary benefits, well below the current rate of 9.8% (at the time of writing on Oct 22). So although there is some protection, it’s not keeping up with real-world values.
So when looking at your CETV, it’s important to consider whether your pension scheme is currently offering a fair transfer value. And even though bond yields are higher than before, a pension transfer could still be an attractive option depending on your circumstances and objectives. As the value is not the only consideration. You will also need to consider flexibility, investment growth, taxes including income tax and possible lifetime allowance taxes, death benefits, and currency options among other things.
Despite CETV’s lowering in value for those who have a transfer out recommended, there is some good news. Global stock markets have moved away from their all-time highs, meaning that those transferring now will buy at a discount to those who transferred earlier in the year.
Regardless of rises in interest rates and inflation you should try to avoid ‘timing the market. Your CETV could rise, or it could fall. Timing the market is almost impossible. Any decision should be based on whether your current CETV allows you to meet your goals.
If you are considering transferring your final salary scheme, you should always seek high-quality, independent financial advice from a specialist.
First and foremost, It’s imperative to determine whether transferring is in your best interests. This is particularly important in the current environment.
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