Transfer values have continued their sharp fall during June, according to XPS Pension Group’s index.
Increases in long-term gilt yields contributed to a month-end average of £203,000 ($244,000, €238,000), the lowest value seen since November 2014.
This is a 24.8% decrease in pension transfer values from £270,000 in December 2021.
Mark Barlow, head of member options at XPS Pensions Group, said: “Recent rises in gilt yields have seen transfer values plummet for most members. This is likely to make a transfer look less attractive and, as a result, we may see transfer activity remaining subdued for some time.”
Scam warnings
XPS’ Scam Flag Index also registered an all-time high, with 97% of transfer cases reviewed by the XPS Scam Protection Service being assessed as having one or more scam warning signs, up from 83% in May.
This was primarily driven by the overseas investment amber flag required by the new transfer regulations, which was raised in 85% of cases assessed.
If this particular flag were to be removed, then the number of cases where scam warning flags were identified would fall to 62%.
Helen Cavanagh, client lead of member engagement hub at XPS Pensions Group, added: “The full effects of the new transfer regulations are now clear. While we support the aim of the regulations to stop pension scams, the prevalence of the overseas investment flag is causing unnecessary delays for some members.
“Whilst the government and the Pensions Regulator have recognised concerns from the industry regarding the wording of the regulations, we expect this pattern to persist unless they are revised.”
Timing
Inflation increases may also have an impact on the timing of retirement and transfers. On 20 July, consumer price index reached 9.4% – as inflationary pressures push prices higher.
While inflation is still predicted to rise in the short term, longer-term expectations of inflation have started to fall as the immediate causes of high inflation are not expected to last and the recent interest rate rises start to take effect.
Analysis from XPS Pensions Group’s DB:UK Funding Watch shows that, as a result of falling long-term inflation expectations, UK defined benefit long-term liabilities over the last three months have surprisingly reduced by around £140bn.
But the majority of increases to members’ benefits will be based on inflation rates published later in 2022, and retirement options may not reflect this expected higher level of inflation.
This may mean that a member choosing to retire in early 2023 could see a material increase in their pension compared to retiring at the end of 2022 due to their benefit receiving an additional inflationary increase in 2023.
This may equate to a potential 7% difference and over £10,000 worth of extra pension income over a lifetime for the average pensioner, therefore delaying retirement could be in some members’ favour.
Charlotte Jones, senior consultant at XPS Pensions Group, said: “Against a backdrop of rising prices, optimising retirement income is more important than ever. How a pension is calculated can be difficult to understand at the best of times and most members are unlikely to be aware that their pension could be very different if they chose to retire in 2023 compared to 2022.
“With inflation expected to fall in the long term, this is only likely to be an issue that members will need support with over the next year or so. There are various ways that schemes can ensure their members have all of the information they need to navigate through their retirement decisions either via adjustments to retirement quotes or communicating with members.”
