What Is An Enhanced Pension Transfer Value?

What Is An Enhanced Pension Transfer Value?

Low interest rates, poor yields on government bonds and rising UK life expectancy are just three factors that mean final salary schemes are paying out for longer than expected in a world where investment returns have disappointed, making them increasingly difficult for companies to afford.

A sizeable number of final salary schemes are now closed to new members; today they’re generally only offered by the public sector or the largest private sector companies.

As well as cutting costs by closing schemes to new members, some companies have also been providing existing members enhanced transfer values or transfer incentives to leave these pension plans.

An enhanced transfer value is an offer your defined benefit pension scheme will make 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 many of the current enhanced transfer values are at new highs, partly as companies look to tempt employees to leave the scheme to reduce future liabilities and try to fill pension fund ‘blackholes’ that have appeared in some schemes.

What Is The Difference Between A Cash Equivalent Transfer Value and Enhanced Transfer Value?

A cash equivalent transfer value or CETV is the amount of money your final salary pension fund is willing to offer you (which will be invested in a defined contribution pension) in order to leave your defined benefit scheme and give up all future claims to an income from it.

You usually have to request a CETV from your pension provider, although sometimes it may be mentioned on an annual pension statement.

An enhanced transfer value, 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’s probably better to stay where you are.

Our 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.

Should I Consider A Final Salary Pension Transfer?

For the majority of people, the answer is no.

A final salary pension scheme is incredibly valuable and provides you with a risk-free income for the rest of your life. They’re underwritten by the Pension Protection Fund (PPF), which will guarantee you a level of income even if your employer and its pension scheme goes bust.

It’s hard to replicate the benefits from a defined benefit pension scheme using a defined contribution scheme, so the reality is that most people will be better off staying where they are.

Ultimately, whether or not a final salary transfer is right for you will depend on your circumstances. Factors that may make a transfer suitable for you could include:

• The size of your pension pot
  A larger pension pot may be more suitable for a transfer than a smaller one
• What kind of income you’ll need in retirement
  If you’ll need a regular, guaranteed income in retirement then there’s no real substitution for a final salary scheme. If, however, you want to vary your income throughout retirement then a transfer to a drawdown arrangement may be an option worth considering.
• Your age and how close you are to your desired retirement age
  Transfers tend to be more suited to people nearer the scheme’s retirement age or nearer the age where they could access defined contribution pension schemes (55).
• Your state of health
  If your state of health is such that you’re not expected to enjoy a particularly long retirement because your lifespan is compromised, then you may benefit from a defined benefit pension transfer because you won’t get much back from a final salary scheme due to your shortened retirement expectations
• Whether you want to leave pension lump sums to beneficiaries
  The income from a defined benefit pension scheme can be left to a dependent spouse, who’ll usually receive a percentage of the income for the rest of their life. However, it’s harder to leave a final salary pension to anyone else and there won’t be any lump sums to leave loved ones, which could be one reason to transfer
• Any tax you might have to pay as a result of the pension transfer or as you take your new pot of pension cash
  You may find yourself over the lifetime allowance after a transfer and facing a tax charge on the excess above the lifetime allowance of up to 55%, which could significantly eat into any transfer value you receive.

The Benefits of Enhanced Transfer Values

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 examining whether a transfer is right for you.

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, with no inheritance tax to pay
• You can take income or 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.

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