- What is a final salary pension?
- What is an enhanced pension transfer offer?
- Is now a good time for a final salary transfer?
- Is an enhanced transfer value the same as a cash equivalent transfer value?
- Benefits of enhanced pension transfer values
- Final Salary Transfer Advice: Should I take my enhanced transfer offer?
How does a final salary pension work?
If you’re a member of a final salary pension plan, you won’t have a pot of retirement savings with your name on it to live off in your old age.
Instead, you get a promise from your employer to pay you a pension for the rest of your life after you retire, with the amount you get usually linked to your salary at retirement and the length of time you’ve spent with that employer.
This income is generally index-linked to keep up with inflation and may even offer a reduced widow’s or survivor’s pension for your spouse after your death until the end of their life.
While very generous for employees and retirees, final salary pensions are an expensive promise for employers. This is especially true as people live longer and investment returns continue to disappoint.
What does an enhanced pension transfer value mean?
An enhanced transfer value is an offer your final salary pension scheme will make you over and above what it feels is the current ‘market rate’ for transfers at that time.
Enhanced pension transfer offers are not new. They’ve been offered in the past when schemes have faced notable financial stress as an incentive for members to leave final salary pensions to cut schemes’ future liabilities.
However, with today’s unique combination of circumstances – a rapidly-ageing population with a growing life expectancy and record-low bond yields offering final salary schemes miserly investment returns – many of the current enhanced transfer values are at new heights.
What’s the difference between a pension cash equivalent transfer value and an enhanced transfer value?
A cash equivalent transfer value or CETV is the amount of cash your final salary pension fund is willing to offer you to leave the scheme. You usually have to request a CETV from your pension provider, although sometimes it may be mentioned on an annual pension statement from your provider.
An enhanced transfer value (ETV), on the other hand, involves your pension fund contacting you with a higher transfer offer as an incentive for you to leave your pension scheme at that time. This may be due to some unexpected financial pressures within the scheme or with your employer, or simply as part of an exercise to reduce future pension liabilities.
It’s important to consider how any enhanced transfer value you receive compares to others being offered in the market today. Even though it may be enhanced for the your pension scheme, if it’s still below current market norms it may be better to stay where you are.
Drewberry’s Final Salary Pension Transfer Calculator can help plot your transfer value against the rest of the market to see if you’re being offered the best pension transfer deal.
Pensions & Investments Expert at Drewberry
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Should I be considering a final salary pension transfer?
Whether or not a final salary transfer is right for you will depend on your circumstances. Factors to consider include:
- the size of your pension pot
- what kind of income you’ll need in retirement
- your age and how close you are to your desired retirement age
- any tax you might have to pay as a result of the pension transfer or as you take your new pot of pension cash.
If your final salary scheme is worth more than £30,000, it’s a regulatory requirement that you seek pensions advice and get expert help with your transfer. This will help ensure that any pension transfer is right for you as an individual and safeguard your retirement savings.
To see how much your defined benefit pension could be worth if you were to leave the scheme, Drewberry has built a Pension Final Salary Transfer Calculator to provide a demonstration of the kind of transfer values that are on offer in today’s environment.
If your pension provider has already provided you with a transfer value – which could be an enhanced pension transfer offer – then Final Salary Transfer Calculator by Drewberry can also benchmark this value against the market to check whether you’re being offered a good deal.
Without careful analysis of your individual circumstances, it’s impossible to know whether a final salary pension transfer is right for you personally. That’s where the team here at Drewberry can help if you get in touch.
However, generally speaking, pension transfer values are currently at or around record highs as final salary schemes look to nudge members towards leaving to cut the cost of providing these pensions. For many people, that makes now a particularly good time to be considering a final salary transfer.
Wealth & Pensions Expert at Drewberry
What are the benefits of taking an enhanced transfer value?
If it becomes apparent that the enhanced transfer value your pension provider is offering you is sufficiently attractive given your age, the size of your entitlement from your pension scheme and various other factors, then it may well be worth taking the offer and transferring your pension.
An adviser is best-placed help you decide if this is the case for you, but some of the benefits of leaving a final salary scheme in exchange for an investment in a defined contribution scheme include:
- It’s easier for your loved ones to inherit your pension if it’s in a money purchase scheme and you don’t buy an annuity, particularly if you’re in pension drawdown. You can leave it to a wider range of people with no inheritance tax to pay.
- Transfer values are currently very high and may never be this high again.
- You can take tax-efficient lump sums out of your pension starting from the age of 55 – many final salary scheme restrict access until you’re 60 or 65.
- Your income could be more flexible. With income drawdown you can dial up or down your pension income as you see fit, which can be better for tax purposes than receiving a fixed sum each year from a final salary scheme.
- It removes risks associated with your employer falling into financial difficulties because you’ll no longer be relying on them for your pension. The Pension Protection Fund – the provider of last resort for those in final salary scheme where the employer had gone bankrupt – has a strict cap on the benefits you’re entitled to if your final salary scheme is transferred into it.
Need advice on your enhanced pension transfer offer?
Many people who receive an unexpected enhanced transfer value from their pension provider are very tempted to take the offer, exchanging ready cash today for a guaranteed income in the future.
However, it’s worth considering whether you’re truly getting value for money from the deal. There are a number of factors to be considered when deciding if a final salary transfer is best for you and it may well not be, or at least not at the rate your pension scheme is willing to offer.
This is where Drewberry’s team of expert pensions advisers can weigh up the pros and cons for you and provide you with unbiased advice.
The pension experts at Drewberry have had lots of experience dealing with final salary pension transfers and are well-placed to help you decide whether it’s the right option for you.
We can look at your individual circumstances to see if a transfer makes sense as it stands, and check whether an enhanced transfer value you’ve received is a fair reflection of the market. So for expert pensions advice, don’t hesitate to pop us a call on 02084327333 to talk through your options.
Pensions & Investments Expert at Drewberry