If you have a final salary pension scheme, you may have heard about the option to transfer it into a pension pot.
This process involves valuing your current pension to get something called a cash equivalent transfer value – or CETV.
This is the size of the pension pot you’d be given in exchange for giving up your defined benefit / final salary pension (note that these terms are often used interchangeably).
Read on to find out more about CETVs and how yours might affect about whether to transfer your pension or keep it where it is.
What is a cash equivalent transfer value (CETV)?
The cash equivalent transfer value is the amount your current pension scheme will offer you if you want to transfer out of your defined benefit pension and into a defined contribution scheme.
It’s expressed as a lump sum, but you won’t receive it as a lump sum. Instead, this amount will be used to purchase a pension pot that could – in theory – generate a similar retirement income to your current defined benefit pension.
However, this is not guaranteed, and the new pension might generate less income (or sometimes more).
How do CETVs work?
If you are considering transferring out of your final salary pension scheme, you’ll be quoted a CETV figure.
This is used to purchase a pension pot, of the defined contribution type. Alternatively, if you are ready to start drawing your pension, you can use it to set up a drawdown scheme.
You can even use it to purchase an annuity – although there aren’t many reasons why you’d choose to do this, since your original final salary scheme works like an annuity, but is probably more generous.
What’s the difference between pension fund value and transfer value?
Pension fund value is the current value of a defined contribution pension pot.
Transfer value (CETV) is the amount your provider will offer you for transferring out of your defined benefit scheme. In other words, your CETV will become your pension fund value after you’ve transferred out.
What affects the CETV?
Working out your CETV is a complex process involving many factors.
As well as considering how much you and your employer contribute, and how long you’ve contributed for, it’s also based on some personal and social factors.
- Your age and your scheme’s retirement age
- Life expectancy
- The cost of living
- Your relationship status
- The pension transfer value index
- How much your provider wants to encourage you to transfer out
CETVs can rise or fall depending on all of these factors. It’s worth keeping an eye on the pension transfer value index, which tracks the current value of pension transfers.
Higher figures mean you’ll be offered a higher amount, so if the figure drops, so may your CETV.
Many schemes have faced deficits in recent years, so have been encouraging members to transfer out by offering very large CETVs.
This in turn has led to a surge in people transferring out, so some schemes have paused offering transfers or lowered their CETVs again.
How is the CETV used during divorce?
Pension pots are considered joint assets, so you need to divide them if you separate from your spouse or civil partner.
Therefore, even if you don’t choose to transfer out of a defined benefit pension, the CETV will be used to work out how much of the pension each party is entitled to.
In cases of divorce, the pension provider may agree to split the guaranteed income payments between the scheme member and their ex-spouse, as determined by the financial settlement.
Find out more about pensions and divorce.
What are the rules surrounding CETVs?
You can request a CETV once every 12 months at most, and the figure you’re offered will stay the same for this period. Once you ask for your CETV, your provider must give you it within three months.
If your CETV is over £30,000 and you are thinking of transferring the pension, then it’s compulsory to take financial advice.
Some schemes strongly recommend or even insist on financial advice for valuations below this threshold, too.
Should I transfer my final salary pension scheme?
Many employers are moving to defined contribution schemes because they can be costly for employers to run.
You won’t be transferred out of a defined benefit pension without your consent, though an employer may close it to new contributions and move you onto a defined contribution scheme going forward (in which case you retain the benefits you’ve built up to date).
There can be some advantages to transferring out of a final salary scheme:
- You get to access your money from the age of 55
- You can make use of pension freedom to get a more flexible income
- You can pass on any unspent pension pot tax-free to your family
- Your CETV may be high, giving you more money to spend now.
However, there are also big downsides to transferring, such as:
- You will be giving up a guaranteed income for life
- Your money will become exposed to the stock market, so can fall in value
- There is a very real risk of running out of money
This is why it’s vital to take independent financial advice first, as a pension transfer is final – you can’t go back on your decision.
Therefore any decision needs to be based on a careful, expert assessment of all your circumstances.
If you found this article helpful then you might also find our article on pension recycling informative, too.