Pension savers are becoming increasingly enticed into transferring their pot as the amount of cash they can receive for pulling their money out of gold-plated “final salary” schemes hit at an all-time high.
After a lull during lockdown, a growing number of people have ditched their final salary or “defined benefit” pension schemes in favour of easily accessibly but risk modern pensions.
Cash transfer values have hit record highs this summer. Defined benefit pots can be swapped for a multiple of the promised income. The estimated cash transfer value of a 64-year-old with a £10,000 a year pension, with inflation increases, was worth £260,800 in mid-June. That is according to XPS Pension Group, a consultancy, which reported that values have since fallen slightly to £259,700 by the end of June.
Values continued to creep up during the pandemic since March, when they sank as low as £223,000.
The increase was a result of a rise in long-term inflation expectations during the month, partially offset by a small increase in long dated Government bond yields over the month, XPS said.
This will be welcome news to the over-55s who will be forced to unlock much-needed cash as a result of the financial difficulties caused by the economic downturn during the pandemic.
Switching a defined benefit pension for a modern defined contribution plan gives greater flexibility, but comes with far greater responsibility and risk.
Fewer savers made transfers during the early months of lockdown, according to figures from the consultant. The number of transfers hit the lowest levels in years and was a third lower than the levels seen through most of last year.
However, activity bounced back to the highest levels seen since March 2019 with a rate of just over 10 in every 1,000 eligible members transferring each year.
Helen Ross, of XPS Pensions Group, said the increase in transfer activity during June is possibly the result of pent-up demand as savers hesitated or their schemes temporarily suspended transfers.
Requests for transfer value quotes have also increased, indicating that this trend is likely to continue, she said.