The curse of the transfer value!

bear 2

“at my analytic best”

There is a curse to having money that was bequeathed us by the later Chancellor. It is called “freedom” and it applies to the rights that  baby boomers have in final salary schemes. It’s not just those in their fifties, many younger folk have defined benefit rights but most of us don’t really pay attention to their pension till they’re able to take the money.

The curse is choice and the choice is particularly acute right now. There’s a “transfer now while low bond yields last” feel in the house. Meryn Somerset-Webb writes in the Financial Times, “If I had a Final Salary Pension , I’d cash it in now“.

Imagine you had invested in something back in 2009 and it had returned 25 per cent every year for the past seven years — a total return of about 480 per cent. Then imagine that the value of that investment was 100 per cent linked to the bond market. What would you do?

Meryn choose her words carefully, your defined benefit may not be invested in bonds but it is valued by the cost of buying expensive bonds to pay you a promised income. The value of those bonds is falling daily as the world wakes up to the probability of future interest rate rises and the chances are that the value of your (defined benefit) pension will fall from its current valuation.

Transfer now while (low) bond yields last?

Except you can’t without permission from a regulated financial advisor who will give you a piece of paper you can show your pension trustees proving you have taken advice. The price of these pieces of paper is extortionate. Very few advisers will issue them for less than £1000 and typically they cost anything from 1-3% of your transfer value.

With bond yields so low , transfer values are (as Merryn points out), typically 40 times your prospective pension. So a measly pension of £80pw might be worth over £200,000 in transfer value. That would typically trigger an advice bill of between £2k abd £6k.

You might call this profiteering on behalf of IFAs, they will point to the manual process they have to follow to get to know you and issue a personalised recommendation.Advisers qualified to recommend on transfer values are also subject to a higher degree of regulatory supervision and have to take extra exams

But the truth is that the biggest headache for an IFA is the threat of being sued by you if the advice turns out to be mis-selling! You are in fact helping to pay for the professional indemnity insurance needed to cover the IFA’s potential liabilities if he or she gets it wrong.

Transfer now if you can afford it?

For many people, entering into an advisory process which may spew out the answer “no” for the hefty advisory fee, is unattractive, a barrier to exit. But like refugees from the third world , many investors will stop at nothing to get their freedom. And like those refugees, baby boomers waiting for their freedom – are getting frustrated.

Like those dispersed from Sangatte, the exiteers are now dispersed with no common voice but a common frustration that while they wait the value of their transfer value may be slipping.

One of my actuarial colleagues has pension rights he is waiting to access. He knows the value of everything but he is yet to find the right price to get it!

I am working with people who are trying to reduce the cost of transfer advice but fear that by the time we find a solution, the transfer values will have fallen faster than the advisory costs. The exciteer cannot seem to win!

Should we panic?

It’s a rhetorical question to which you’d expect my answer to be “no”, but I’m not so sure. The absolute value of your defined benefit is the benefit and that will not change with the prospect of interest rates. So if you are rewarded less for a slight up-tick in bond yields, you are an absolute loser. In pure economic terms – Meryn is right

My friend is taking the money — and his chances with it. It is, he says, the last gift he expects from the great bond bull market. But it’s a good one.

The real returns needed to beat the guarantees of the defined benefit seem to make taking a transfer an economic “no brainer”.

But pure economics was not enough (for me)

As regular readers know, I recently took my defined benefit pension, not as a transfer value as a pension. I didn’t even take my tax free cash – I just took a pension. It wasn’t huge as incomes go- it certainly doesn’t replace my current earnings – but it’s a pension that is guaranteed to increase whatever the markets do and is backed by a strong employer which continues to fund the pension scheme from which it is paid.

The alternative was potentially more from my transfer value, but with that potential for more, was a potential for less (if I screwed up the investment, the potential for my underestimating my capacity to survive on this planet and the potential for me to worry about the markets with the management of my money doing me more (mental) harm than good.

The size of my transfer value also brought with it an unwanted tax liability against the Lifetime Allowance with my transfer value exceeding the technical valuation (for tax purposes) by nearly two and a half times.

So the answer for me was – don’t panic and draw your pension

I resent the amount that I was being asked to pay for advice on what I have to do. I resent the amount of time I was spending worrying about whether to transfer or not. In fact I resent to the curse of pension freedoms altogether.

I look forward to the day- in 12 years -when my first state pension payment arrives in whatever will then pass for my bank account. Hopefully i will not have to spend time deliberating on transfer values for that and can get on with having a damned good time as a pensioner.

We have cursed ourselves with choice, the baby-boomers are cursed with transfer values and with the need for costly advice. Those – like the refugees – who make it, find that their drawdown policies are cursed too with high charges, high volatility and a high risk of pounds cost ravaging where market falls  deplete the pension at an unforeseen rate.


While I can sit back in comfort , allowing someone else to drive my train, I still have an aching wish for that superhigh transfer value I never took. I too am cursed- by the negative capability of what I could have won.

But I am learning to live with certainty. It is a cheery if unexciting friend. I suggest to myself that – as the years go by – I will learn to love my boring decision.

Sometimes the best advice is to do nothing at all. Despite understanding Meryn’s arguments that’s what I did – I suspect that most like me would do well to be as boring as me.

Bear 5

silly me


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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6 Responses to The curse of the transfer value!

  1. Kai Tang says:

    You forgot a 3rd option to take your transfer value today while yields are low, invest cautiously or not at all and wait for yields to improve and then take an annuity later on down the road. The warm blanket of certainty would never leave your side 🙂

  2. Donaldson Nicholas says:

    So, you’re 55 or thereabouts and are now in receipt of a “not huge” DB pension but which had a transfer value of £2.5m? You declined to take PCLS despite being, presumably, a higher rate tax payer and you resent paying £2,000 or so for regulated financial advice. Interesting. What was it Oscar said, “…he knows the price of everything but the value of nothing…”

    You forgot the fourth option btw, transfer and enter into phased drawdown so that most of your early income is tax-free; target a balanced natural yield from bonds & shares to avoid unit encashment. And your family could have benefited from what’s left of your pension pot in the event of your early demise.

    • henry tapper says:

      I didn’t forget phased drawdown- I just didn’t think I could manage the money to produce the same outcomes- and I didn’t think any adviser could either( the numbers are a bit out BTW! – the gist of your argument is right and I was probably too cautious. But to use a behavioural phrase’better the devil you know’

  3. henry tapper says:

    Nicholas, a pension of £25,000 is not huge, but if you transfer it at 40:1 you use 100% of your lifetime pension allowance. The PPF set the limit for “ordinary pensions at other £36,000. which works out at a 40:1 CETV conversion rate at around £1.5m. A 2/3 final salary promise paid in full for someone on £60k is £40,000 pa.

    You can see from this that it is not just the super-rich who are getting million pound pay outs , the £2.5m CETV could result from a final salary of less than £100,000

    While this is not “just getting by” territory, it is not beyond the expectations of many retiring at the moment.

    • Brian Gannon says:

      Whilst I do not question your decision not to transfer, a pension of £100,000 per year is super rich. Maybe you wrote this comment before you worked at the Crisis Centre, but I suspect most people would consider a guaranteed pension of £100,000 to be super rich.

  4. henry tapper says:

    I think you mistake Brian, my pension is not £100,000 pa!

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