What is a £5,000 a year pension worth?

One of the answers to that £5,000 question – and there are many – is “a transfer value of 30 times the pension, in other words - £150,000”.  

If you’re surprised, then you are not alone. Two years ago such a transfer value figure would have been virtually unbelievable. Back in 2014, a multiplier of around 20:1 was common, making £5,000 a final salary pension worth around £100,000 if you were to transfer close to retirement. So why the big increase in values?

The main reason is the sharp drop in long term interest rates. Since October 2014, the yield on the benchmark 30 year UK government bond (gilt) has halved. Final salary pension schemes use long term yields to assess the value of their pension liabilities and so the value of those liabilities increases when bond yields fall. One side effect has been a large rise in company pension scheme deficits.  

The pros and cons of transfer 

There have even been suggestions in parliament that employers should be allowed to break their pension scheme promises in an effort to bring down deficits and escalating contribution levels.  

Exchanging £5,000 of pension for £150,000 of pension fund can have several advantages, such as a possible increase of over 60% in the tax-free lump sum you can draw. However, there are significant disadvantages, too, not the least of which is that you have to forgo the promise of known benefits, usually with in-built increases once pension payment begins. 

The decision on whether to transfer is a complicated one. If your transfer value is more than £30,000 – which could mean a pension of £1,000 a year – under government rules your pension provider must make sure that you have taken regulated financial advice based on your own particular situation before allowing any transfer to be made. We think that makes sense for any transfer 

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.