You might have seen headlines saying that UK interest rates are being cut and wondered:
“If interest rates are coming down, will my defined benefit (DB) pension transfer value go back up?”
In short: not necessarily.
That’s because the “interest rate” you hear about in the news is not the main one used to work out DB transfer values.
Here we explain:
- Why the rates that matter for DB transfers are still high
- What that means for transfer values now, and
- What (realistically) would need to change for them to rise again.
The rate you hear about – and the ones you don’t
When the news says “the Bank of England has cut interest rates”, they’re talking about the Official Bank Rate.
- This is a short-term rate.
- It influences mortgage rates, credit cards, savings accounts and so on.
- It goes up and down when the Bank of England wants to cool or support the economy.
But DB pension transfer values aren’t based directly on this rate. They’re mainly based on long-term interest rates, especially the yields on UK government bonds, called gilts.
Think of it like this:
- Bank Rate = today’s weather.
- Gilt yields = what people think the climate will be like over the next 10–20 years.
DB schemes care far more about the “climate” than today’s “weather”, because they’re paying pensions for decades.
What are gilt yields, and why are they still high?
A gilt is just an IOU from the UK government. If investors lend money to the government for 15 years, they want an interest rate that they feel compensates them for:
- inflation over those 15 years,
- the risk that things don’t go to plan in the UK economy or public finances,
- the fact their money is tied up for a long time.
The interest rate they demand is the gilt yield.
Although the Bank of England has started cutting its short-term rate from its peak, 15-year gilt yields are still relatively high by recent standards. In very simple terms, markets are saying:
- “We don’t expect interest rates to go back to near-zero like they were after 2008.”
- “We’re still nervous about inflation staying too high.”
- “The UK government is borrowing a lot, and the Bank of England is no longer a big buyer of gilts – so we want a better return.”
Those worries and expectations are baked into long-term yields. So even if the headline rate drops a bit, long-term gilt yields may move only slightly, or not at all.
And those are the rates DB schemes care about.
How DB pension transfer values are actually worked out
A defined benefit pension promises you an income for life – for example:
“£10,000 a year, rising with inflation, from age 65 for as long as you live.”
To work out a cash equivalent transfer value (CETV), the scheme asks a simple question:
“How much money would we need to set aside today, invest it sensibly, and be confident we can afford all those future payments?”
To answer that, they:
- Estimate all the future pension payments they’ll have to make to you.
- Use discount rates – based largely on gilt and corporate bond yields – to turn that stream of future payments into a single lump sum today.
Here’s the key bit:
- Higher discount rate → you “need” less money today → lower transfer value.
- Lower discount rate → you “need” more money today → higher transfer value.
When gilt yields were extremely low (around 1–2%), schemes had to assume they’d earn very little on their investments. That meant they “needed” a lot of money now to cover your future pension – so transfer values were very high.
When gilt yields jumped to 4–5%, the maths flipped. Schemes could assume higher returns, so they “needed” less money today – and transfer values fell sharply.
Why falling Bank Rate doesn’t automatically lift transfer values
Putting it together:
- The Bank of England can cut short-term rates.
- But if long-term gilt yields stay around 4–5%, the discount rates used by DB schemes won’t fall much.
- If discount rates don’t move much, transfer values don’t move much either.
So you can easily have this situation:
- News: “Interest rates cut again!”
- Reality for DB transfers: long-term yields barely change → CETV stays low.
That’s why you shouldn’t assume:
“Interest rates are falling again – my transfer value must be about to bounce back.”
It might rise a bit if long-term yields drift down, but a big jump back to the old “golden era” levels would probably need a substantial drop in long-term gilt yields, not just a few quarter-point cuts from the Bank of England.
Could transfer values rise again?
They could – but it depends on things that are hard to predict, such as:
- Inflation truly settling back at target and staying there.
- Weaker economic growth, pushing markets to expect much lower interest rates for years.
- A much more reassuring picture on government borrowing, so investors demand a smaller “risk premium” to hold UK gilts.
If those stars aligned, long-term yields might fall enough to push transfer values higher.
But there are also forces that could keep yields high – or even push them higher – such as stubborn inflation, more government borrowing, or higher global interest rates.
In other words: you can’t rely on a big “correction” in yields, and timing a transfer based on interest-rate guesses is a gamble.
What this means if you’re thinking about a DB transfer
The main takeaway:
Falling headline interest rates do not guarantee higher DB transfer values.
If you’re considering a transfer, the more important questions are:
- Do you value a guaranteed, inflation-linked income for life, or would you prefer a pot you can invest and draw down but which can go up and down?
- How comfortable are you with investment risk and the risk of outliving your money?
- What other pensions, savings, or sources of income do you have?
- Do you have a spouse or dependants to consider, and what benefits do they get from the scheme?
A transfer might or might not be right for you, but that decision shouldn’t be based solely on hoping that rates move and your CETV jumps.
This article is for general information only. It explains why DB transfer values have fallen and why they might not increase just because “interest rates are coming down”. It is not personal financial advice. If you’re seriously thinking about transferring a defined benefit pension, you should speak to a financial adviser who can look at your full situation, explain the trade-offs, and show you how sensitive your transfer value is to changes in interest rates.
