As the Financial Times reports, the average transfer value for a 55-year old who had been expecting a £10,000 a year pension jumped to £258,000 (almost x26 multiple), up from £247,000 a year ago.
The total value of defined benefit pension transfers has reached £60 billion in the last three years, with the pension regulator disclosing that 390,000 people have used pension freedoms to access their DB (defined benefit) pot during that period.
Why Are Pension Transfer Values So High?
Valuations are high because UK government bonds (known as gilts) have seen a steady decline in yields. In fact, yields are at an historical low. See the chart below showing the percentage yield on the 15-year gilt.
The ‘yield’ of a bond is the return that the owner gets from holding the bond. Under UK rules, pension scheme administrators must use gilt yields to calculate the cash-in value of a pension entitlement. The theory being that the lump sum offered must be sufficient to allow the member to buy enough gilts to fund his retirement at the same level.
Hence, as gilt yields hit an all-time low, DB schemes are offering up to x30 multiples for members cashing in and taking a lump sum (into a SIPP, for example).
A Note of Caution
Cashing in your DB pension entitlement and transferring to a SIPP may not be right for you.
The FCA has been worried that the surge of people using this pension freedom may be fuelled by poor financial advice. Pension transfers into expensive products, that are not properly explained to clients, are a mis-selling scandal waiting to happen.
For this reason, under UK law every DB transfer must be advised by an independent pension transfer specialist.
Please contact me for a free no-obligation discussion about your UK pension transfer.