What determines the cash value of your DB pension?
Breaking down some of the variables behind the cash value of your pension.
28TH AUGUST 2017
Those who belong to a defined benefit pension scheme are guaranteed a consistent pension income for life – but transferring out is becoming an increasingly attractive option for over-55s, owing to the large sums being offered by a number of firms.
Why? The very nature of these schemes has proven costly for many businesses, particularly as life expectancy rates continue to climb. As a result, many companies are cutting their losses by offering their employees substantial amounts to transfer out of their defined benefit pensions – six figures in some cases.
These amounts do vary, but what variables have an impact on the amount you could be offered? How do you value a pension?
First and foremost, defined benefit schemes are underpinned by interest rates. Gilt yields have plummeted in recent months, with the uncertainty surrounding Brexit undoubtedly playing a part; transfer values have been boosted as a result. Should the interest rate rise, as has recently been suggested by certain sections of the media, the eye-catching transfer values currently on offer could drop substantially.
DB scheme payouts will also rise and fall with inflation, which has been predicted to hit 3.2% before the end of the year, thus driving transfer values higher.
Personal choices and circumstances will also affect the offers you may receive. For example, those closer to retirement can expect higher offers, as there are less long-term variables in play.
As touched on previously, life expectancy is also creeping up – over 81 years of age on average, according to the latest statistics.
The longer employees are expected to live, the more employers expect to stump up to relieve their pension burden.
Similarly, most companies expect their scheme members to be married, and would usually pay out a proportion of the pension to the surviving spouse. This assumption is reflected in the transfer value; as a result, those who are single may stand to benefit more from transferring out.
These are just some of the stipulations which could have an impact on any potential transfer value you could stand to receive.
For a more detailed discussion about what affects the value of your final salary pension, and whether transferring out is right for you, talk to us today.
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