Pensioners opting for pension transfers get record cashouts with the favourable bond market movements
August was one of the best times for individuals to cash out of their final salary style pensions as payouts hit record highs amid the worries surrounding a global recession.
Pension freedoms allow qualified individuals to give up their “defined benefit” schemes in lieu of a hefty upfront payout, thereby giving away a fixed income for life post-retirement. These active members can transfer these cashouts to “defined contribution” plans that provide higher flexibility and control over withdrawals.
According to pension scheme administrators, pension transfer values are close to record highs with members receiving larger-than-ever payouts. The primary reason behind soaring transfer values is the upward movement witnessed in haven investments like UK long-dated gilts as investors seek protection in an uncertain global fiscal environment. It is critical to note that pension transfers use long-dated gilts to calculate cashout amounts.
The data from XPS Pension Group indicates transfer value as high as £258,000 in August for a 55-year old who would otherwise receive annual benefits of £10,000 through last salary pension schemes. The average transfer values in the previous year stood at £247,000.
As more investors purchase government bonds, pushing yields lower, these cashouts will rise proportionally.
Defined benefit pension transfers have witnessed enormous growth in the past three years reaching net payouts of £60bn, as per the data from Royal London. Further analysis of the data indicates that over 390,000 individuals have accessed their defined benefit pension funds through pension freedoms in the same period.
The Financial Conduct Authority is issuing new regulations surrounding the standards of advisory services active members receive for pension transfers.
The City Watchdog announced multiple measures in July to uplift the advice standards for pension transfers after witnessing a growth in these payouts despite its recommendation favouring defined benefit pension that offer consistent lifelong income over cashouts.
Financial experts believe that irrespective of the market conditions, the choice of opting for pension transfers is entirely personal. Individuals have a different viewpoint when it comes to analyzing and facing risks.
One must note that transfers exceeding £30,000 require the services of a financial advisor under the law. Members giving up their defined pensions for early cashouts should consider the benefits as well as shortcomings of their decision in the long run.