What is a Cash Equivalent Transfer Value?
Your Cash Equivalent Transfer value is the amount your pension scheme will give you if you decide to transfer out of your Final Salary Scheme. It is not the same as your Pension Fund amount.
You should receive an annual update from your Pension Scheme Administrator that contains this information but if you do not have an up-to-date estimate you will need to request your Cash Equivalent Transfer Value (CETV) from your Pension Scheme Administrator.
How is my CETV calculated?
Your CETV is calculated using a number of variables as set out by your pension scheme administrators:
1. The Investment strategy of the scheme you are in
Many Final Salary Schemes have switched to low-risk investments to ensure that they can pay their member’s pensions. Pension Schemes “discount” transfer offers by the return they expect to make on their investments: the lower the return, the higher the sum needed to pay the pension and hence the higher the transfer value.
2. Your age and how close you are to retirement
Research published by LCP and Royal London in 2018 showed that transfer values rise as you near retirement. This is because there is less time for the scheme to grow its assets to meet the promised payments.
By law, final salary pensions must rise in line with prices. So the cost of living and whether your scheme uses CPI or RPI to calculate inflation will all affect your transfer value.
4. Life Expectancy
Since Final Salary Schemes expect to pay out until death, average life expectancy will impact on transfer values. Schemes work on an ‘average member’ when calculating their sums, so if you are not typical of an average member, you may find your value is affected as such – for instance, if you are an office-based middle manager at a company that mainly employs manual labourers your transfer value may seem generous, obviously the opposite is also true.
5. Marital Status
Schemes work on the assumption that everyone in the scheme is married and that they will need to provide a dependent’s pension. If you are single or widowed then your transfer value may appear generous in comparison.
6. Scheme Health
If the scheme is under-funded or if there have been a large number of people transferring from the scheme affecting its funding position or the solvency of the scheme then transfer values will be impacted accordingly.
The rules allow for transfer values to be reduced to protect the remaining members in the scheme.
Should I transfer my Final Salary Pension?
Transferring out of a Defined Benefit Pension scheme (Final Salary) is an irrevocable decision that shouldn’t be taken lightly or without advice from a qualified pension transfer specialist. The default position used to be that it was always a bad idea to transfer out of these schemes but with the new pension rules introduced over the last few years, there are instances where an argument can be made for a transfer to be in someone’s best interests.
In April 2015 sweeping changes to the pension industry meant that those with private pensions now have much more freedom and choice in how they access their pensions. These changes along with other factors have made the idea of transferring out of a Final Salary Pension Scheme much more attractive. Here we run through some of the main reasons you might consider transferring out of your Final Salary Pension: –
HIGH TRANSFER VALUES
Transfer values are decided on a number of factors relating to scheme members but they are also based on the investment performance of the scheme itself. Many Final Salary Schemes have switched to low-risk investments to ensure that they can pay their member’s pensions. Pension Schemes “discount” transfer offers by the return they expect to make on their investments: the lower the return, the higher the sum needed to pay the pension and hence the higher the transfer value.
A high transfer value may make transferring an attractive prospect if you can make better use of your pension with the added flexibility that a personal pension scheme can offer you.
FIXED RETIREMENT AGE
Final Salary Schemes normally have a fixed retirement age. Some schemes (not all) may offer a Protected Pension Age below the state pensionable age but there is not much flexibility when it comes to early retirement. Whilst it may be possible to retire early there are usually hefty penalties for doing so and you will have to sacrifice a percentage of your income to do this. You’ll also need permission from the Pension Trustees and/or your employer to retire early.
It is always best to check with the Pension Scheme Administrator to find out exactly what benefits you have attached to your pension.
TAX-FREE LUMP SUM
The pension changes brought in in 2015 allow private pension holders to access a 25% tax-free cash lump sum from their pension from 55. Individuals can access this lump sum without needing to draw the rest of their pension.
With a Final Salary Pension, whilst you may be offered a cash lump sum on retirement, the calculation used to determine your cash lump sum is based on the scheme’s own rules and often results in you receiving less than 25% of your pension pot.
The bigger the lump sum you withdraw, the more future pension you sacrifice – and the reductions can be significant. The amount you will have to give up varies from scheme to scheme.
PASSING ON WEALTH WHEN YOU DIE
Changes to Inheritance tax rules in October 2014 brought greater flexibility over who can inherit your pension. Private Pensions in drawdown can now be left as a legacy to any beneficiary that you nominate. These changes do not apply to Final Salary Pension members.
Inheritance rules for a Final Salary Pension differ from scheme to scheme but generally, they will pay a reduced pension of between half to two-thirds to your spouse or dependent child when you die. Exactly how much, depends on when you die and the scheme you’re in. If you’re single and without dependent children, any pension that you have built up gets absorbed back into the scheme pension pot when you die.
Scheme benefits are based on an ‘average’ scheme member. Almost all schemes assume the need to pay out a dependent’s survivor pension so if you’re single your Cash Equivalent Transfer Value may seem more generous than if you were married.
If you have ill-health and a reduced life expectancy the amount you receive from your final salary pension remains the same. When you die, depending on the scheme rules, your Spouse will usually receive reduced benefits that they will have to pay income tax on.
If you were to transfer to a defined contribution scheme then you could take advantage of an enhanced annuity which could provide an attractive alternative for those who are not in good health and could provide a higher income than if you took the income available from your final salary scheme.
Alternatively, if passing money on to your beneficiaries on death is a priority, it could be beneficial to transfer your pension to a drawdown pension and take advantage of the inheritance rules surrounding personal pensions. Whatever the reason, your health could have a bearing on whether or not a transfer is in your best interests.
If your Pension is over the Lifetime Allowance (LTA) your Pension Scheme Administrators will deduct the additional 25% tax at source from your pensionable income, they’ll adjust the amount as soon as your pension becomes payable.
Under defined contribution arrangements, current tax rules allow wealthy individuals using Flexible Drawdown to defer the Lifetime Allowance Tax until they are 75. This can be achieved by keeping drawings within the LTA limits up to age 75 (and gaining the benefit of a largely tax-exempt investment account until that date), when the surcharge tax will become due on the excess value of the fund.
If you have no need for the funds in excess of the LTA then you could consider leaving these invested in your pension. Although you have to pay the LTA charge of 25% at age 75, the funds will remain outside of your estate. If you die after your 75th birthday your ultimate beneficiaries will have to pay income tax on the benefits but this may be preferable to you paying income tax on the income and inheritance tax (currently 40%) on any funds that remain in your estate.
This calculator is provided for general information purposes only. It is a guide and does not reflect the actual transfer value that you will need to obtain from your Pension Scheme Administrator.
Any information contained within this website should not be deemed to constitute financial advice, and should not be relied upon as the basis for a decision to enter into a transaction, or as the basis for any financial or investment decision. It is provided for general information and it is vital (and in most cases a regulatory requirement) that you contact a Qualified Pension Transfer Specialist for tailored professional advice in regard to the suitability of any transfer.
- No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles.
- If you are a member of a pension scheme with safeguarded benefits, it is likely it would be in your best interests to retain the safeguarded benefits.
- Make sure you understand all the risks before investing.
- The value of investments and the income they produce can fall as well as rise and you may not get back your original investment. Past performance is not a reliable indicator of future results.
- Once you transfer, you will become responsible for the management of your investments.