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The Impact of Interest Rates on Your UK Pension Transfer

Following several years of the RBA keeping Australia’s Cash Rate Target below 1.00%, successive interest rate rises throughout 2022 has seen the cash rate reach highs not seen in over a decade. While the focus on rate rises is the impact on inflation, the stock market or local property markets, less is understood about the impact on the bond (debt) market, and in turn, the impact it can have on a UK pension transfer value. As rates continue to rise, particularly UK Government bond yields (the interest paid on UK debt), there is renewed urgency for UK expats to consider the impact on their pension schemes and whether now is an opportune time to transfer their pension to Australia. So, what’s the urgency, why should UK expats consider transferring their pension, and how does it all work? Read on to find out…

Why Transfer Your UK Pension Now?

Transferring your UK pension to Australia can form a significant component of your retirement planning strategy and give you access to additional income and capital in retirement. UK defined benefit (DB) pension schemes, commonly known as final salary pension schemes, provide a guaranteed income in retirement depending on several factors, such as your salary upon leaving the scheme and the length of time you were a member.

The cash transfer value of such a scheme is calculated by working out the amount of money required today to provide you with an equivalent income in retirement, with the UK bond yields having a significant impact on the amount of transfer value offered. The record high transfer values offered by DB schemes prior to Covid-19 came about as a result of record low interest rates, with the trend then reversing following the rapid rise in interest rates throughout 2022 and 2023 – with transfer values falling as a result.

Since October 2023 we have seen the 10-year UK bond yield (interest rate) drop from 4.65% to 3.41% at the end of December 2023 as a result of the expectation that the Bank of England will begin to cut rates in 2024. This sudden reduction in bond yield offers a potentially significant increase to the transfer value offered from a UK defined benefit pension scheme.  Given this potential economic tailwind, now is an opportune time to consider whether a transfer of your pension is appropriate.

What are the Benefits of Transferring Your UK Pension?

The upsides to transferring a UK Pension to Australia are many and varied, but there are a few highlights worth considering. One key benefit is tax efficiency – any income or lump sum you receive from a UK pension once you retire is taxable. However, if you transfer the funds to Australia, you have the opportunity to draw the income in retirement free from tax – leaving more in your pocket.

Transferring your pension now rather than deferring also provides a safeguard against future legislative changes. The UK and Australian governments have made significant changes over the years, impacting some expats’ eligibility to transfer whilst adding greater complexity, time, and effort to the transfer process.

The UK Government has recently released legislation which increases the minimum pension age in the UK from 55 to 57 by 2028. As such, this increases the time you may have to wait before you are able to transfer your funds to Australia by a further two years. By taking action now, you can avoid delaying the transfer of UK pension whilst protecting yourself from further changes to legislation which may impact a transfer in the future, or make it altogether impossible.

Next Steps

If you have a UK pension scheme and are unsure what to do and whether transferring your fund to Australia is right for you, particularly as it relates to current interest rates, please contact us for a complimentary initial consultation with one of our UK pension specialists. You can reach the PTS team on 08 9233 9269, or feel free to email us at pensions@ptspecialists.com.au.

written by:

Will Lyons

Will has 15 years industry experience working in both consultant and technical positions. Prior to becoming a qualified Financial Planner in Australia, Will worked as a pensions consultant in the UK gaining Advanced Diploma qualifications whilst working there. He has also attained an Advanced Diploma in Financial Planning and has completed the FASEA Financial Adviser Exam and Ethics qualification.

At McKinley Plowman, Will has progressed over the years from our UK Pensions Division all the way through to senior Financial Adviser and now Associate Director within the Wealth team – amassing invaluable experience and knowledge along the way.

Will is a keen cyclist and occasional triathlete that loves going out and socialising with friends.

Will is an Authorised Representative of Fortnum Private Wealth Ltd.