The Press and Journal (Inverness, Highlands, and Islands)
Beware rising interest rates effect on pensions
Since the UK Government’s pension reforms were introduced, we have seen a number of workers transferring defined benefit into defined contribution (DC) schemes.
In doing so, many people have secured attractive transfer values they can tap into from the age of 55 without being substantially penalised.
But any further interest rate increases could make pension transfers far less appealing. Low interest rates have often made transferring from DB to DC schemes a financially astute move, with some people being offered multiples of up to 40 times their projected post-retirement income. Higher interest rates will, however, decrease that value.
At the end of 2017, UK inflation grew to 3.1%
– its highest level in six years.
That is well above the Bank of England’s 2% target and could prompt the Bank of England to follow the US Federal Reserve and start to progressively raise interest rates.
DB pension holders who are considering a transfer should seek further guidance as a
“Values usually depend on ages and number of members”
matter of urgency. There could be considerable benefits in transferring before a potential increase in rates.
Many of the energy sector clients we have supported with transfers have found this a lucrative option.
In one case last year, a former oil and gas sector operations and maintenance manager with just under 20 years’ service was offered a cash equivalent transfer value (CETV) of more than £865,000 to move his pension fund into a DC scheme.
Someone else who had worked for a renewableenergy company for nearly 20 years and was latterly earning an annual salary of £82,000 was offered a CETV of £1,459,000 for transferring.
While some pensionholders like these will benefit from pursuing a transfer, there can also be risks.
Unanticipated economic and political events can adversely impact the value of DC schemes, making it essential for people to seek professional advice.
For pensions which are transferable – bear in mind that some are not – the values usually depend on the ages and number of members in the scheme and its funding position.
Once again, it is critical to seek independent advice on these factors as well as your overall financial situation and retirement plans.
If your circumstances merit it, transferring a DB pension into a DC scheme can be a financially astute course of action.