August 2022 has not been a great month for those seeking to transfer out of their defined benefit (DB) schemes.
XPS Pension Group’s Transfer Value Index showed that, by month-end, values had fallen again, continuing the trajectory of the last eight months.
The index recorded an illustrative average value of £197,000 in August, more than £70,000 below the high at the beginning of the year and the first time values finished below £200,000 ($226,600, €229,000) since records began in June 2016.
For those who have sent off a transfer request, however, the scam prevention rules introduced in November 2021 are still struggling to make an impact despite clarifications from The Pensions Regulator and the Department for Work and Pensions issued in July.
According to XPS, 91% of the cases the firm reviewed in August contained at least one scam warning flag, with the presence of overseas investments in the receiving scheme still the most common concern.
Mark Barlow, head of member options at XPS Pensions Group, said: “Rising gilt yields have meant that many transfer values on offer are now lower than at any point in the last five years, including during the market shock caused by the emergence of the pandemic. Whilst some pension scheme members may decide whether to transfer based on prevailing market conditions, others may be driven to transfer out of necessity during the current cost of living crisis.”
Helen Cavanagh, client lead, member engagement hub at XPS Pensions Group, added: “We have very much entered a phase of continued high scam warning flag volumes as the full impact of the transfer regulations are being felt. [The government’s] MoneyHelper has, so far, dealt well with managing appointments due to the increased volumes of referrals. However, in our view, we would see far fewer referrals if overseas investments in the receiving scheme was not an amber warning flag.”
Other options?
For those feeling disincentivised from transferring out of their DB pots, an ‘old-fashioned’ solution may be coming back in vogue.
Analysis by Hargreaves Lansdown shows that annuity rates have reached their highest levels in more than a decade, with a 35% increase in the last 12 months alone.
For instance, someone aged 65 with a £100,000 pension could now get an annuity income of £6,637 per year compared with £4,900 in September 2021, the platform explained.
The last time annuity rates reached similar levels was in March 2010 when a 65-year-old man could get an income of £6,678.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said: “Annuity rates continue to soar – increasing by 35% this year alone – reaching a level not seen for more than a decade.”
She added: “Annuities once ruled the roost in retirement income but the low rates on offer meant they faced criticism that they offered poor value for money. The introduction of Freedom and Choice, which gave people much more flexibility over how they took their pension, saw their use decline hugely. These rising rates could encourage people who wouldn’t have thought of purchasing an annuity this time last year to give them serious consideration.
“Many people will have a need for some level of guaranteed income during retirement and so annuities should always form a part of any retirement income conversation. Once an annuity is bought it cannot be unwound and this can concern would-be annuitants who don’t want to lock into a rate that then subsequently rises.
“However, you are under no obligation to annuitise your pension in one go. A good approach could be to annuitise in stages, securing income to meet your needs as you need it. This gives you the opportunity to secure higher rates as you age, and you may also qualify for a further boost to your income through an enhanced annuity if you develop a medical condition at a later point. It also gives you the chance to keep the remainder of your pension invested for longer where it can hopefully benefit from investment growth,” she said.
