Answered by Michael Englefield
Pensions and cash equivalent transfer values: What does CETV mean?
Thanks for your question. It’s one we’re increasingly getting asked as the final salary pension transfers market grows on the back of current sky-high pension transfer valuations.
Here, we’ll try to briefly explain pension cash equivalent transfer values (CETVs) and just what CETVs mean for your pension.
Final salary pensions and CETVs
For those people with a defined benefit pension – also known as a final salary pension – a cash equivalent transfer value is the lump sum the pension scheme will offer you in exchange for you giving up any future claims to a pension from the scheme.
The CETV is a lump sum meant to be equivalent to what it would cost you to buy the same pension income that the scheme would have provided you, based on your age, health, final salary pension entitlement and other factors.
If you agree to take your employer’s pension scheme up on a CETV, you receive the sum of money on offer. This is known as a final salary pension transfer. You then use the pot of money you get to provide a retirement income instead of receiving a pension from your company.
What’s the difference between a pension fund’s value and a pension fund’s transfer value?
A cash equivalent transfer value is based on a multiple of your pension entitlement. For more on working out how much you’ll receive in retirement with your final salary pension, click here.
The CETV calculations, on the other hand, are meant to arrive at a sum equivalent to the cash you’d need to buy the same retirement income your company would once have offered.
This is hard to work out yourself. However, a tool such as the Drewberry Final Salary Cash Equivalent Transfer Value Calculator takes the hard work out of getting an estimate of how much your final salary pension is worth.
Should I transfer my final salary pension?
If you’ve got a cash equivalent transfer value through the post, the money on offer can look incredibly tempting, especially with today’s high valuations.
However, it’s important to remember what you’re giving up by transferring out of your DB pension scheme, including a guaranteed pension income for life. If you cash in your pension by agreeing to take your scheme’s CETV, you can’t change your mind.
There’s also no guarantee the cash won’t run out if you live longer than you expected or your investments – which you’ll now be in charge of – underperform.
This said, transfer values have never been so high and there are incidents of people being offered multiples in excess of 30 times their pension entitlement as a cash equivalent transfer value to leave their final salary scheme.
There are also benefits to transferring out of your final salary pension, including the ability to leave your new pension pot to your family members if you die. Most defined benefit pensions die with the pensioner, or only pay a reduced widow’s pension to a surviving spouse. That’s true even if you’ve been paying into the scheme for your entire working life but die just a year after you start collecting your final salary pension.
If you’re thinking of taking the CETV your defined benefit pension fund is offering, it’s highly recommended you talk through your options with a pensions adviser. It’s also a regulatory requirement to do so if your final salary pension is worth more than £30,000.
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