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Why Are Defined Benefit Transfer Values So High?

Defined benefit transfers are not new, but have been a legal right to deferred pensioners since the eighties. However, they seem a particularly attractive option at the moment due to one main factor - historically low gilt yields.

As defined benefit pension schemes have to provide fixed pension incomes in retirement, the most important return factor in the calculation used by actuaries to work out cash equivalent transfer values is the risk free investment return based on UK gilt yields.

Gilts or Government backed securities provide a guarnteed return to a future date and are used by the scheme actuary to discount the cost of future payments when calculating their current cash equivalent value and hence the transfer value. 

As gilt yields fall the cost of annuities and the value of cash equivalent defined benefit transfers rise. If the reverse were true and interest rates and therefore gilt yields began to rise again then transfer values would fall. Therefore low gilt yields in this current low interest environment are providing a considerable opportunity to consider transferring a high cash sum to a flexible pension arrangement.

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