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Savers swapping out their defined benefit (DB) pensions for cash now could receive £300,000 less than what they would have at the start of the year after transfer values hit an “unprecedented low” in September. According to XPS Pensions, the numbers suggest pensioners would get a sizeable 41 percent less if they were to cash in their gold-plated pensions now.
The mass drop comes as a result of the turbulent markets and increases in gilt yields of last month.
A defined benefit pension plan provides an employee with a specified pension payment or lump sum on retirement that depends on an employee’s earnings history, tenure of service and age, rather than depending on the employee’s direct investments.
However, thousands of savers choose to transfer their final salary (DB) pension to a modern pension, which can be cashed out in one go.
The reason this option is particularly attractive to savers is due to the potential of drawing a larger cash lump sum than if they remained in the DB scheme, according to Pensions and Investment company Royal London.
But, transferring at today’s rates means an average 64-year-old would get £300,000 less than they would have done in January, according to the consultancy XPS Pensions Group.
The Group found that an average retiree with a £30,000 salary from a defined benefit pension scheme could expect a transfer value of £447,175, compared with the £758,374 it would have been worth at the start of the year.
This comes as the XPS Pensions’ Transfer Value Index saw DB transfer values hit lows of £181,000 at the end of September, representing a drop of £16,000 over the month, and a fall of eight percent.
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The index fell as low as £150,000 on September 27, following the market reaction to the Tory mini-budget, in which gilt yields briefly jumped to five percent per annum.
Commenting on the figures, XPS Pensions Group head of member options, Mark Barlow, stated: “Whilst the focus on pension funds in recent weeks has been largely on gilt rates and their impact on scheme investments, DB promises remain largely unaffected.
“However, pension scheme members considering a transfer will be impacted as values fall to their lowest level for almost 20 years.
“On the other hand, those using their transfer to secure benefits in alternative arrangements, for example, annuities, will see marked improvements which may offset some or all of the fall.”
Annuities give retirees the opportunity to secure a fixed income for life by converting savings into an annual pension.
The initial cause of the market turbulence that sent bond prices plummeting was the raft of unfunded tax cuts unveiled in the mini-budget at the end of September, without an economic forecast from the Office of Budget Responsibility (OBR).
Pension funds were forced to sell liquid assets to meet the margin calls that this uncertainty triggered, some of which were gilts, which drove yields up further.
The Bank of England was forced to intervene to calm the markets, launching an emergency programme to buy Government bonds instead.
The programme ended at the start of October and the 10-year gilt yield has continued to fall, reaching 3.59 percent today.
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