DB transfer value growth mystery

PaddyLondon

Six months ago I got a transfer out quote from BT with a transfer value of £111,750

Six months on, a new quote gives the value as £118,350 - growth for six months of 6% - annualized would be 12%.

Why the difference?

What factors influence this? Birthdays?

Could that rate of growth continue until I retire? It implies when I am near sixty I could transfer c, £200k into my SIPP, and have the asset rather than the income (I know that is not advised, but it's an option that allows my daughter to inherit)

kidmugsy

PaddyLondon wrote: »

(I know that is not advised, but it's an option that allows my daughter to inherit)

Taking a good DB income, and taking out life insurance that will pay out to your daughter, might be a more profitable policy.

SJD48

Continued fall in gilt yields will be helping.

Linton

SJD48 wrote: »

Continued fall in gilt yields will be helping.

No doubt

For the OP: If interest rates fall, the scheme needs more money now in order to pay for your pension in n years time. So the more they will be prepared to pay you to transfer out.

mania112

SJD48 wrote: »

Continued fall in gilt yields will be helping.

How do you figure?

I would say it is most likely for one of the following reasons:

1) Service anniversary
2) Pay rise
3) Actuarial review of the scheme within those 6 months

DaveMcG

The transfer value in a DB scheme theoretically reflects the amount to buy similar benefits on the open market.

Because the cost of buying a secure income is related to the income from bonds, it moves up and down when interest rates go up and down. However, rather counter-intuitively transfer values fall when interest rates rise and rise when interest rates fall.

The scheme estimates your benefits at retirement and then discounts these for each year to retirement because they anticipate that they will receive investment growth. So the transfer value will rise as you get closer to retirement because the discount is less.

It is unlikely that the growth is due to the discount factor, so the majority of the increase must be due to the bond interest rate assumption (As SJD48 said in much fewer words) and this is unlikely to continue until your retirement.

kidmugsy

kidmugsy wrote: »

Taking a good DB income, and taking out life insurance that will pay out to your daughter, might be a more profitable policy.

Forgive me for quoting myself, but let me add (as a non-expert open to correction) that the insurance you'd want is a Whole of Life Policy, and that it must be written so that the money goes to your daughter (or presumably to a family trust) rather than joining your estate. That way there's no Inheritance Tax exposure. Moreover, you'd be wise to ensure that the monthly payments for the insurance are fixed; you don't want the insurer bumping up its charges later in life. I suppose it's obvious, but I imagine that you could take out such a policy whenever you want; there would be no need to await retirement.

Your_Hero

kidmugsy wrote: »

I suppose it's obvious, but I imagine that you could take out such a policy whenever you want; there would be no need to await retirement.

Only poor health would stop that from happening (and more expensive premiums/loadings as you age).

It's a good suggestion though if OP is just concerned about bequeathing a lump sum. Just to add to the comment about placing it into a suitable trust, the monthly premiums of the life policy will also fall under the 'regular expenditure out of income' rule so will be IHT-free.