UK-based advice and consultancy firm LCP is calling on all defined benefit (DB) pension scheme members to make informed decisions before deciding to transfer out.
The company is concerned that savers will rush into a transfer due to the current decrease in transfer values.
According to its data, transfer quotes taken by members peaked in Q3 2020 at around £550,000 ($653,000, €647,000), whereas the ones issued in Q1 2022 returned to 2014 levels at just under £300,000.
The record levels experienced in 2020 and 2021 were largely attributed to the fall of interest rates to “ultra-low levels”, meaning that they made DB pensions expensive for some schemes to finance and, as a result, providers offered higher transfer values to those willing to leave the scheme.
But with transfer values declining over the past few months, LCP is worried there is going to be a “panic buy” that might not always benefit the client.
Take everything into consideration
The firm said people should wait out the current dip as there is a variety of factors that can influence the “generosity of transfer values” beyond interest rate levels.
Some of these factors may point to lower values in the future while others may lead to higher ones, but people “need to be prepared to wait”, it added.
This means that retirees should not try to “time the market” because sometimes the way value is calculated changes significantly scheme by scheme – in some instances, LCP said, the sum offered could be double between different providers.
The consultancy firm said transfer values tend to vary according to:
- The ‘generosity’ of the scheme – if schemes are de-risking their investments they are more likely to offer a higher value; and
- Members’ longevity – the longer life projection retirees have, the more expensive pensions are to provide and, as a result, the higher transfer values can be.
Clive Harrison, partner at LCP, said: “Although a further increase in long-term interest rates could lead transfer values to fall, there are other factors which could go the other way. Our research suggests that many schemes have improved their transfer values in recent years, and that trend may well continue.
“We also find that for an individual member their transfer value is likely to increase as they get closer to retirement, other things being equal. This means that DB scheme members should be careful not to ‘panic buy’ DB transfers on the assumption that transfer values will only go in one direction.
“Transferring out of a DB pension is a big decision which should always be made after taking careful note of expert and impartial financial advice”.