The Final "salary" Countdown

For many individuals receiving statements from their final salary pension scheme, there has been a growing concern. The transfer value quoted in these statements is appearing much lower than in previous years.

This has understandably ignited fears about the safety and security of their pension, particularly for those who, in the general scheme of things, would not typically consider transferring anyway.

Meanwhile, members who made the decision to transfer at earlier, more opportune times can breathe a sigh of relief. With current transfer values ranging between 35% to 45% lower today than they were at their peak, these individuals can feel thankful for having taken action when the conditions were far more favourable.

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Final Salary Schemes Guarantees

Final salary schemes, also known as defined benefit pension schemes, promise to pay a predetermined amount to the member upon retirement. This is based on the member's salary at the time of retirement and the number of years they've been a part of the scheme. The significant advantage of such schemes is that the pension is guaranteed. It's not affected by the ups and downs of the stock market, and the risks are borne by the employer rather than the individual.

Falling Transfer Values

According to recent data from XPS Pensions Group, the value of a typical defined benefit transfer reached its lowest month-end value since 2018. Specifically, the transfer value index plunged by nearly 3% over September to a sum of £154,000, which is notably 15% lower than the previous year.

Since the inception of the index in 2016, transfer values have decreased by a substantial third.

So, what's the primary driver behind this decline?

The surge in gilt yields, particularly when the Bank of England chose not to elevate interest rates this past September, is the main contributor. Inflation expectations have stayed stable amidst these changes, leading to a continuous decline in the index.

As one would expect, as transfer values have been falling, so too have the number of individuals taking up the offers. The Transfer Activity Index, also by XPS, shows numbers have been falling in concert with values with the last quarter seeing some of the lowest transfer volumes since the inception of the Index.

Reflecting on Transfer Choices

When we scrutinise the experiences of those who capitalised on higher transfer values from their pensions, a different perspective emerges - one that mitigates any concerns over the subsequent lacklustre market growth.

It's pivotal to recognise that for those who acted during the zenith of transfer values, the apparent stagnation in the markets since then doesn't tell the whole story.

Consider the scenario: had these individuals held back, the transfer values they'd be looking at now would hover around the £150,000 mark.

Yet, for the duration spanning 2018 to May 2022, the figures being quoted were considerably loftier, often exceeding £230,000 and sometimes reaching beyond the £270,000 threshold.

The difference here isn't trivial - it represents an implied growth of over 50%.

So, despite the markets not showing much dynamism, individuals who transferred out when the going was good have effectively locked in what could be seen as a significant return.

This would have been unattainable had they decided to transfer at the current reduced valuations. Therefore, while current market conditions might suggest stagnation, for those proactive movers, the decision to transfer at peak times has proven to be a prescient financial manoeuvre.