Why has my pension transfer value gone down?

A pension transfer value is the amount a provider would pay if a pension were moved to another provider. It’s essentially the cash value of your pension benefits, worked out at the time of transfer. It’s worth noting that this number won’t always be the same as your total pension pot, or the full value of your retirement benefits. Instead, it’s a calculated estimate based on a few financial factors.

Transfer values are especially relevant for defined benefit (DB) pensions , which can promise a guaranteed income in retirement based on your salary and years of service (or other forms of guaranteed benefits). If you’re considering transferring a DB pension, the transfer value reflects how much your trustees believe it would cost to provide those benefits elsewhere.

DB transfer values are worked out using estimates about the future. These include things like:

• how long you’ll live.
• how inflation might affect your pension.
• the current market conditions, considering interest rates and investment returns.

Because of this, pension transfer values can change over time.

There are many things that can affect your pension transfer value, and these things can differ slightly depending on the type of pension you have.

For defined benefit (DB) pensions, transfer values are affected by interest rates and gilt yields. When these rates go up, the cost of providing future pension payments goes down, which usually means lower transfer values. Inflation and economic uncertainty can also influence how much a pension is worth when transferring.

For defined contribution (DC) pensions, the transfer value depends on the current market value of the investments. If markets drop suddenly for example, if stock or bond prices fall, the transfer value may go down. Economic changes and how investments perform can also affect the amount received when moving a pension to another provider.

How interest rates affect pension transfer values

For defined benefit (DB) pensions, transfer values are affected by interest rates. When interest rates go up, the value of future pension payments goes down, which usually means a lower transfer value. This happens because pension schemes use something called a ‘discount rate’ to work out how much money is needed now to pay benefits later. Higher interest rates increase the discount rate, so less money is needed today, and the transfer value drops. These rates change with the market, which can cause transfer values to rise or fall.

As an example, imagine your DB pension promises to pay you £10,000 in retirement. If the interest rates are low, your scheme will need to set aside more money today to guarantee those payments, so your transfer value will be higher. On the other hand, if interest rates go up, the scheme can achieve the same future payments with less money now, so your transfer value drops.

Then you have defined contribution pensions, and while interest rates don’t directly impact them in the same way they do defined benefit pensions, they can still influence your transfer value through market performance.

These pensions are invested in assets like stocks, bonds, and funds. So, when interest rates rise, bond prices will typically fall, and stock markets may also react negatively, especially if borrowing becomes more expensive for companies. This can lead to a drop in the overall value of your pension pot. For example, if your DC pension is heavily invested in government bonds (gilts), a rise in interest rates could lower the value of those bonds, reducing your total pension pot and your transfer value.

There are a few different ways you’re able to check the transfer value of your pension:

• Long in and check your online account.
• Call your pension provider or financial adviser and request a Cash Equivalent Transfer Value (CETV).
• Check your pension statement, though this will reflect the value as of a specific date and may not be current

You should make sure, especially if you have a DB pension, that you review the assumptions behind the valuation that you receive, as these can be influenced by different things like:

• interest rates
• gilt yields
• inflation and life expectancy
• scheme funding levels.

You should also try to regularly review your pension to ensure you’re tracking your fund’s performance, prepared to adjust depending on your personal circumstances, and ensure that your pension is continuously aligned with your retirement goals.

For defined benefit (DB) pensions, transfer values may increase if interest rates fall. Lower rates raise the present value of future pension payments, which can lead to higher transfer values. Improvements in scheme funding, such as stronger investment performance or fewer future liabilities, can also help. However, recovery is not guaranteed and may take time.

For defined contribution (DC) pensions, recovery depends on how investments perform. If markets improve after a period of volatility, the value of the pension pot and the transfer value may rise. This is more likely when the pension is invested across different types of assets. Even so, short-term market changes can be unpredictable, and recovery may take time.

Regardless of your pension type, it’s important to focus on your long-term retirement goals, rather than short-term fluctuations

Whether you decide to transfer your pension or not is entirely up to you. But there are a few factors worth considering before you do. There is no guarantee you will be better off by transferring.

Before making any decisions, it’s worth taking a moment to think about personal retirement goals and what feels right for the future. Speaking to a regulated financial adviser can help make sense of the options and guide the next steps with confidence. You may pay a fee for this advice.

If you're looking to transfer a DB pension with a transfer value of £30,000, the scheme trustees will require you to take suitable financial advice, for which you may have to pay a fee.  Some providers of other pensions will require you to take that advice before accepting any transfers from DB schemes, whatever the value.

At Aviva we pride ourselves in the support and tools we can offer.

With our free Find and Combine service, with just a few clicks we can help you:

• Find any old or lost pensions that you might have forgotten about, that could leave you better off in retirement.
• Check for any valuable benefits that could be lost at transfer, as well as any exit fees. Giving you all the information you might need to make a decision. Speak to your current provider/scheme if you're in any doubt, so that they can explain the features of your current pension and the transfer process to you.
• Combine all of your pensions together to give you a clearer view of your retirement savings.

We also have a wide range of retirement tools and calculators, to give you an idea of things like:

• Pension calculator - What you might need to save for the retirement you want.
• Inflation calculator – To understand how inflation could impact your pension.
• Shape my future – Find out how much income you might need to live your dream lifestyle at retirement.
• Pension withdrawal tax calculator – Check how much tax you may need to pay when you take money from your pension.
• Annuity calculator – Work out the guaranteed income your pension savings could provide.

We also offer regulated financial advice, no matter who your pensions are with we can help! If you’ve got pension or investment savings of £300,000 or more, get in touch to set up a meeting. Your initial chat with the team and your first meeting with your adviser is both free, with no obligation to continue. There will be a charge for this service if you decide to continue, these will be explained to you up front before you proceed.