Mark Carney, Governor of the Bank of England indicated this week that he was prepared to see interest rates rise at least one time before the end of this year.
The announcement caught markets off guard as they had been expecting a slower rate rising cycle in the UK in the run up to Brexit. However, with UK unemployment at record lows and inflation running at 2.9% it seems unlikely that The Bank will be able to maintain rates at record low levels for long without causing a major inflationary surge in the UK economy.
Effect on Pension Transfer Values
Final Salary Pension Transfer Values are based on annuity rates which are in turn based on government bond rates. As the interest on government bonds drops it costs more to provide an annuity and hence the transfer value offered to you must rise.
Last year Government bond rates were cut from 0.5% to 0.25% following the Brexit referendum result. This had the effect of boosting transfer values by 40%.
However, this process will now be rapidly reversed. By the end of 2018 we expect to see as many as three UK rate rises.
Our analysis suggests that this will have the effect of cutting current transfer values by almost half (48%). If Interest rates rise back up to a level of 4% where they were in 2007 then transfer values could be cut by as much as 64% from their current levels.
If you never intend to take a transfer value from your scheme then this will not affect you. However, if you are considering an eventual transfer it is likely a future transfer value will be substantially lower even if you pay more money into the scheme in the coming years.
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