Pension Transfers

Many people have either received a pension transfer valuation from a former or even current employers pension scheme or may have heard of a friend or colleague who has. Following this you will then find in the majority of cases that in order to transfer away from the scheme you will require specialist advice

The reason for this is very straightforward, the benefits in a secured pension arrangement are very valuable and have a number of guarantees that are attached to them. These guarantees are very varied and depend on the scheme rules, the date you left the scheme, or it was wound up and legislation that applied at the time you left the scheme.

It is important to note that even if you were in the same scheme as somebody you have spoken to, if you left on different days your projected benefits can be significantly different. Every transfer valuation will require individual advice tailored specifically to the individual and their own circumstances to establish if a transfer will be in their best interests.

The reality is in the majority of cases a transfer away from a scheme providing a guaranteed income for life after retirement will not be the favoured option.

Secured benefit transfers explained

Secured benefits are benefits from a final salary or guaranteed annuity, a transfer allows you to exchange a future pension entitlement in these arrangements for a cash sum that must in the first instance be put into a registered, or HMRC recognised pension scheme.

The cash sum a CETV (Cash Equivalent Transfer Value) is the ‘cash value’ of the pension income you leave behind, or put another way the amount of money today that would be notionally set aside in the scheme to meet your specific pension liabilities as they fall due.

In practice the process of calculating a transfer value is done by the scheme actuary based on laid down guidelines. A simplified version of the calculation is:

  • Calculate the members preserved pension at the date of leaving
  • Revalue the preserved pension from the date of leaving up to normal retirement
  • The scheme rules dictating how pensions increase between leaving the scheme and when you retire and in retirement and such things as widow’s benefits and guaranteed periods
  • Calculate the capital cost of purchasing the revalued pension with benefits at the schemes normal retirement age
  • Discount the capital cost to the present day, taking into account expected growth rates

Importantly the calculations use standard assumptions about how long you will live and whether you are married rather than reflecting your own personal situation and state of health. Both the life expectancy factor and the investment return factors are changed from time to time to keep them up to date.

Under the final salary scheme your tax free cash lump sum and taxed pension income in retirement are fixed and guaranteed by the scheme and old employer assuming they both still exist. In some cases scheme liabilities have been sold on to an insurance company who then take on the responsibility for the guarantees. The guarantees extend to increases each year to protect your pension against inflation (usually up to certain limits) and paying your pension for life, no matter how long you live. The longer you or your spouse live the more you will receive from the scheme.

Should you accept the transfer value and transfer the fund to a personal pension you take on the risk. The lump sums and income withdrawals you will be able to make will entirely depend on how you invest your fund and what investment returns are actually achieved. If the fund does well you may end up with more net cash from the transfer value, if the fund does badly you could have significantly less and of course if you end up living a long time you may have to cut your pension income to keep the fund from running out.If you accept a transfer value you will be ‘discharged’ from the pension scheme. This means the sum has been paid in lieu of benefits and you have no further claim on the scheme. The transaction is irreversible.

You can’t buy your way back into the final salary scheme.Taking on the risk by transferring comes with significant transfer of risk and for this reason any transfer value in excess of £30,000 requires advice from a qualified adviser.