Updated: May 15, 2019
Members of final salary pension schemes who have not yet retired can generally give up their pension rights under the scheme in exchange for a lump sum.
This lump sum may then be flexibly accessed, following the introduction of Flexi-access drawdown. Note that transfers are only permitted before your retirement date. If you are already receiving a defined benefits pension you can’t get a transfer value.
Each pension scheme will have its own rules about how it works out the Cash Equivilent Transfer Value. Better known as the CETV. The transfer value will depend on your age, the level of forecast pension when you retire, your retirement date and how generous the annual increases are on your pension, both in deferment and when it gets paid.
The CETV is calculated by working out the lump sum that will be required to provide an equivalent pension to the scheme pension at your retirement age. This lump sum is then reduced (discounted) back to todays date to provide the CETV.
Ultimately the size of the CETV is at the discretion of the trustees provided they are operating in line with the rules of the scheme. The basis for the assumptions set when calculating a CETV are set by the trustees with the scheme actuaries advice. Here is the simplified process below:
Firstly your pension at date of leaving will be calculated. This will be based on 3 things.
Length of service
And the schemes accrual rate
Your pension benefit is then revalued up to the NRD (normal retirement date of the scheme)
This is done using statutory revaluation as a minimumNext this revalued pensionable amount is worked out as a capital cost.
So essentially what lump sum would the scheme need at your normal retirement age to cover the cost of your pension.
This figure is reached by using annuity rates in line with market conditions.When calculating the capital cost, other benefits within the scheme, such as a spouses/dependents pension will be taken into account or if still in employment a lump sum death benefit will also be taken into consideration.
The actuarial basis is determined by the trustees after they have taken advice from the scheme actuary.
This is a “best estimate” assessment of the cost to the scheme of providing the deferred benefit.
This capital value is then discounted back to today (The day of calculation) This discounting is based on the assumed rate of growth in the value of the pension fund. Discounting the capital cost back to today provides the CETV.
Be aware that if your scheme is underfunded the trustees are in fact allowed to make reductions and offer a transfer value that is less than the CETV – however the pension regulator sets guidelines surrounding this. Conversely if the scheme sees you as a large liability on their books you may be offered an enhanced transfer value.
These are becoming commonplace as schemes try to reduce their liabilities and their pension deficit
If you are thinking of transferring or applying for a CETV you should be aware that for all pension transfers worth £30,000 or more it is a strict requirement, laid down by the FCA that a client must take financial advice before deciding whether or not to proceed.