'Gold plated' pensions worth £53,000 less than they were six months ago

Savers swapping their “final salary”-style pensions for cash are receiving £50,000 less than they would have six months ago as another consequence of rising interest rates.

Thousands of people have transferred their final salary or “defined benefit” pensions – which pay a guaranteed income – for modern pensions which can be cashed out in one go.

But transferring at today’s rates pays 20pc less than it did in November 2021, according to consultant XPS Pensions. The estimated transfer value for a 64-year-old with a £10,000-a-year pension was £217,000 in May, down from £270,000 in November last year, it said.

The amount you can receive from transferring a pension has been quickly eroded by sharp increases in the yield on government bonds, known as “gilts”. Transfer values are expected to fall further as interest rates are tipped to rise again to combat surging inflation.

But despite the worsening returns, a rising number of savers made the switch last month.

Mark Barlow, of XPS Pensions Group, said that this increase could be due to the cost of living crisis, as savers struggle to make ends meet and resort to tapping into their pension.

“It is interesting to see a small uptick in members completing a transfer during May, despite the continued slide in transfer values. This highlights the importance of providing support to people to ensure they don’t make an uninformed decision or leave themselves susceptible to scammers,” he said.

Transfer values are inversely related to gilt yields as the future cost of funding final salary pensions falls.

“The huge drop over recent months reflects the fact that you can earn 1.5pc more on Government bonds than you could in November. Small changes in market conditions can make a big difference to the value of your promised pension,” Mr Barlow said.

The cash out value has fallen to its lowest rate since June 2016, according to XPS.

Switching from a defined benefit pension to a defined contribution plan gives greater flexibility, but comes with far greater responsibility and risk. Those who want to transfer a defined benefit pension worth more than £30,000 must seek regulated financial advice.

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