BREWIN DOLPHIN : A ‘perfect storm’ of macro-economic and market turmoil could see those approaching retirement with a defined benefit pension short-changed for the long term, according to RBC...

A 'perfect storm' of macro-economic and market turmoil could see those approaching retirement with a defined benefit pension short-changed for the long term, according to RBC Brewin Dolphin.

The wealth manager said that the transfer value of defined benefit pensions is falling as the yields on gilts - UK government debt - and interest rates rise, significantly reducing transfer values for those holding them. Recently, a £1.3 million lump sum offered to an RBC Brewin Dolphin client by their former employer was lowered by £850,000 in just three weeks.

Employers which historically offered defined benefit schemes, a form of final salary pension, are increasingly offering lump sums to ex-employees in these schemes in exchange for the income liability they have to hold on their balance sheets. There were 909,502 active members of defined benefit pension schemes last year, according to figures from The Pensions Regulator.

The transfer value of defined benefit pension schemes is dictated by prevailing yields on UK gilts and the Bank of England's base interest rate. Savers are typically given a fixed amount to transfer out of the scheme based on the amount of income they can realistically generate from risk-free assets, such as cash, lower risk investments like UK Government bonds, or by purchasing an annuity.

For example, someone with a defined benefit pension offering annual income of £30,000 per year might be offered a lump sum of £1,000,0000 if base interest rates are at 3%. However, if interest rates rise to 4%, they may be given £750,000 to recreate the benefits of their pension.

Daniel Hough, financial planner at RBC Brewin Dolphin, added: "Rising interest rates, high inflation, and low market returns create a perfect storm for short-term thinking. It will mean a lot more companies may make seemingly generous offers to their former employees to get their pension liabilities off their books - a large lump sum payment now may seem tempting, but it may prove a poor long-term decision.

"Retirement can be a complicated business - no one knows exactly what they need and how long it will have to last them. You have to be careful and take professional advice, particularly now with people having more choice - annuities, for instance, were unappealing until recently. It is good to have options, but it can also be a daunting prospect."

Rob Burgeman, senior investment manager at RBC Brewin Dolphin, said: "The low interest rates of the last decade have been an anomaly in the 350 or so years of central banking. With inflation higher and looking difficult to get back under control, it seems the days of ultra-low interest rates are going to be a thing of the past - at least in the short to medium term. When inflation settles, it looks likely to be in the 2%-4% range, rather than the 0%-2% that followed the financial crisis - interest rates will likely have to do the same.

"The shorter dated area of the gilts market looks to be steadying, but the longer part - particularly 20-30 year bonds - is still going up. It is usually longer dated gilts that determine government borrowing costs and, with that, annuity and defined benefit transfer rates. As annuity rates increase now, anyone considering transferring out of a defined benefit pension could find themselves with difficult long-term choices to recreate the pension they would have been entitled to."

Gilt yields, interest rates and inflation since 2000:

Disclaimers
The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Neither simulated nor actual past performance are reliable indicators of future performance. Performance is quoted before charges which will reduce illustrated performance. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. Forecasts are not a reliable indicator of future performance. RBC Brewin Dolphin is a trading name of Brewin Dolphin Limited. Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register reference number 124444).

- ENDS -

PRESS INFORMATION
For further information, please contact:
Peter McFarlane peter.mcfarlane@framecreates.co.uk / Tel: 07412 739 093
Richard Janes richard.janes@brewin.co.uk / Tel: +44 (0) 20 3201 3343

NOTES TO EDITORS
About RBC Brewin Dolphin

RBC Brewin Dolphin is one of the UK and Ireland's leading wealth managers and traces its origins back to 1762. With £51.7* billion in assets under management, we offer award-winning, personalised wealth management services from bespoke, discretionary investment management to retirement planning and tax-efficient investing.

Our qualified investment managers and financial planners are based in 33 offices across the UK, Jersey and Republic of Ireland. They are committed to the most exacting standards of client service, with long-term thinking and absolute focus on our clients' needs at the core.

As part of Royal Bank of Canada (RBC), we are now able to draw on the strength of a global financial institution to continue to improve the service we provide to our clients and drive further innovation across our business.

*as at 26th October 2022.