Final salary pension transfer value
When you receive an offer of transferrable cash, it is useful to know how many years’ worth of pension this would represent in today’s terms. Ignoring returns from investing the cash or the effects of inflation, how many years on a straight-line basis does the Cash Equivalent Transfer Value (CETV) give you?
To be considered reasonable for transfer, the CETV needs to represent at least 20 years’ worth of pension. This means that if your scheme were to offer you £20,000 per year as a pension on retirement then the CETV would need to be at least £400,000. In this case, an offer below £400,000 is unlikely to pass the first hurdle and so would not proceed to the advice process.
The more generous the Final Salary Pension Scheme is with their CETV offer in terms of the annual pension multiple, the easier it is to justify that part of the analysis process though, a recommendation to transfer will not pass solely on this factor alone.
CETV offers vary enormously from scheme to scheme as do the defined benefits offered in that scheme. A thorough analysis needs to be undertaken by the specialist to cover every financial aspect of the offer and to ensure nothing is missed in the process.
Each of the following examples is based on unique individual circumstances, therefore, do not apply to every situation. It is important that you receive appropriate regulated advice before transferring out as you will lose valuable guarantees.
Mike is 55 and lives with his wife in London. His final salary pension entitled him to £21,000 a year from age 55. When Mike requested his pension transfer value, he was offered £758,000 a multiple of just over 36.
Mike’s aim was financial security for himself and his family with the flexibility to access his pension as he wishes.
By transferring the pension, he received a larger element of tax-free cash and can maintain his income in retirement. Mike’s children will now inherit the remainder of his pension following his death.
Ahmed is 57 and lives in Edinburgh with his long-term partner Sharon who is also 57. They are both in good health and intend to retire when they both reach age 65. He would like to have the flexibility to access his pension as it is his only source of income in retirement.
Whilst the transfer value is attractive, Ahmed has no other assets to rely on in retirement, and therefore retaining the guaranteed income in his final salary pension scheme is the best solution as it will provide him with security in retirement.
Keith is 55 from Manchester. He is struggling with his health due to working for many years in manufacturing and wants to retire now. Keith also has a family history of heart disease.
Keith wants the flexibility to take more now, and less in the future – something his scheme cannot offer. In also being conscious of his ill health, Keith is aware that his wife will only receive 50% of his scheme pension if he passes away.
Keith was offered a pension transfer value of £501,000 or a pension of £20,000 a year at 55 (a multiple of 25) and chose to transfer to a personal pension. Now his wife will receive the full remainder of his pension pot if he dies and he can retire today, taking a flexible income as he wishes.