Understanding Pension Transfer Values
Whether you have multiple pensions that you’re considering placing into one pension or you feel that your pension could be better managed by another company (provider), you would probably like to understand what your pension transfer value is — along with other important questions.
Although you could find out the transfer value directly with your current provider, some types of pensions legally require advice before a transfer can be complete.
Perhaps more importantly, unlike other investments, it’s sometimes the case with pensions that changing providers isn’t the best option.
That’s why seeking pension transfer advice is so important — there are pros and cons to consider.
Prosperity Wealth Pension Advisers
Based in the West Midlands, Prosperity Wealth is FCA regulated and has been providing pension advice on transfer values for many years, with thousands of happy clients and £1bn in funds under management.
At Prosperity Wealth, we believe that the value of an adviser is in the detail and the openness we provide, which is crucial when considering changing one of the most important investments in your life.
What Does Pension Transfer Value Mean?
A pension transfer value is how much your pension would be worth if you changed or transferred your pension to a new provider.
Your pension transfer value advice isn’t solely provided based on money alone, though, as your adviser will also consider any costs and loss/gain of benefits of moving to a new provider alongside other factors.
Your adviser will ask you, your existing pension provider, and any new provider questions (which they may already know) to ensure that all of the facts are available before any decision is made or advised upon.
Pension transfer value questions to ask:
- Can your pension be transferred or are there terms and restrictions?
- What is the pension transfer value in comparison to your existing pension pot?
- Are there any fees for transferring the pension away from this provider?
- Will you still be able to take money out of the pension at a certain age?
- Are there any additional benefits on your current pension, such as a guaranteed annuity rate, which need to be compared to a new provider’s offering?
- Will you still be able to take a tax-free pension payment out on retirement?
- Is there a process that needs to be followed according to this provider’s rules?
- Are there any fees charged by a new provider for taking on an existing pension from another provider?
- Are there any rules around how often you need to pay into a new pension or how much?
- What type of investments options are available with a new pension plan, and are their options for different risk levels?
How Are Pension Transfer Values Calculated?
Pension values are calculated differently based on the type of pension. One type of pension is a Defined Contributions Scheme, and the other is a Defined Benefits Scheme (final salary pension).
All pension calculations look at the current monetary value, but a pensions adviser will also look to the future of how the pension could have performed, which is particularly important with Defined Benefit Schemes.
By looking to the future, the calculations provide a more realistic picture, which helps you and your adviser to be able to compare pension schemes.
What Factors Affect Pension Transfer Values?
Pension value isn’t just determined by the current value or the future of the pension itself; it’s also about you and your environment.
Pension advisers use data from many sources to understand how your age, your pension scheme’s retirement age rules, the current cost of living, life expectancy, and other factors will impact your pension.
Add to this an investigation into the small print and the comparison of the benefits, and it’s easy to see the value that an adviser can represent — providing you with the full facts.
Transferring Out Of A Defined Contributions Scheme
A Defined Contribution Pension is built up over time as you and your employer contribute money that is then invested.
This pension type is more common in workplaces today, with the employer automatically taking a set pension amount from your monthly salary and topping it up themselves.
You or your pension adviser will need to contact your current provider to understand what the current value is of your pension.
Unlike a savings account, your pension is an investment that can go up or down, so the value depends on how well those investments have performed over time.
When you first discussed your pension, you would have been asked what risk level you were comfortable with, which helps to determine what type of investments your pension include.
Once the value has been obtained, you and your pension adviser will see what other pension options are available and discuss your current risk level and what your aspirations for retirement are.
Your pension adviser can then compare your current pension value and benefits to your new options and advise you so that you can make a decision with all of the facts available to you.
Transferring Out Of A Defined Benefit Scheme
A Defined Benefit Scheme pension is a more traditional pension that offers a final salary or career average pension.
You must think very carefully before transferring these pensions, as they are rare — offering a fixed income on retirement as opposed to an uncertain one.
Many other pension schemes on the market will struggle to match the income and benefits provided by this type of pension, and not all Defined Benefit Scheme pensions allow you to transfer your pension funds.
Transferring a Defined Benefit Scheme pension requires an adviser to provide a more complex calculation in the format of a certificate, which is called a Cash Equivalent Transfer Value certificate.
What Is Meant By ‘Pension Cash Equivalent Transfer Value’?
A pension Cash Equivalent Transfer Value (CETV) is a comprehensive calculation of your pension transfer value and is presented as a certificate.
The reason it’s a certificate is that it actually forms a legal requirement for the transfer of pensions that are classed as a Defined Benefits Scheme (the final salary pension) where the value exceeds £30,000. Your CETV and supporting information will include:
- The value of your pension at the time of exiting the scheme.
- How your pension would have increased up to retirement.
- Any increase in payment.
- The total transfer value of your pension.
It’s only by understanding what your existing pension would have provided over time that you can get a true picture of what it is worth. The CETV is provided to work out the lump sum that you would need to give an equivalent pension.
There are many technical calculations that are assumed and adjusted based on factors like years away from retirement and more morbid, but necessary, factors like life expectancy.
How To Work Out Pension Transfer Value
It is quite difficult to work out pension transfer value because it takes so many changeable factors into account.
Although you can use the value provided by your current provider as a guide, there are many other aspects of pensions to consider, as mentioned previously. That’s why pension advice is recommended by many organisations in order to support your decision.
Working out pension value is as much about looking to the future as it is the present — making calculated assumptions based on data.
Above and beyond value, a pension adviser will be able to compare pensions once the value has been ascertained, which will allow you to understand what you might lose as well as gain.
The cash sum is only a small part of the comparison, with advisers looking at benefits, flexibility, monthly income, and the terms and conditions of these policies on your behalf. It’s the small print that makes a difference when a need arises, and that’s where advisers excel.
What Can I Do With My Pension Transfer Value?
As soon as your pension transfer value has been calculated professionally, you have some options on what to do next:
- A new employer’s workplace pension scheme
All new workplace pension schemes work on a contributory basis, which would mean agreeing an amount to be taken from your monthly salary towards your pension. Your employer has to contribute to your pension once you are paid over a certain monthly amount.
Your employer may offer enhanced pension contributions as part of your employee benefits scheme, but this is at their discretion. As with all pension schemes, you’ll have the choice of what type of investments you would like your pension to be made up of. A pension adviser will discuss this, and your aspirations for retirement, with you, as this will determine how much you should contribute each month and affordability.
- A personal pension scheme
A personal pension scheme is a pension that you set-up yourself. Known as ‘defined contribution’ or ‘money purchase’ pensions, you pay into them yourself without the need for employer involvement, although, some workplace pension schemes include personal pensions.
They work the same as a workplace pension in that you make a regular contribution and choose where to invest your money based on your attitude to risk.
Personal pension scheme: a self-invested personal pension (SIPP)
A SIPP is exactly how it sounds, you invest in the specific investments to make up your pension fund. You can often choose from:
- Unit trusts.
- Investment trusts.
- Government securities.
- Insurance company funds.
- Traded endowment policies.
- Some National Savings and Investment products.
- Deposit accounts with banks and building societies.
- Commercial property (such as offices, shops or factory premises).
- Individual stocks and shares quoted on a recognised UK or overseas stock exchange.
Personal pension scheme: a stakeholder pension (SHP) scheme
A stakeholder pension scheme is one where the Government has set specific requirements that the pension needs to meet as a minimum:
- Limited charges.
- Charge-free transfers.
- Flexible contributions.
- Low minimum contributions.
- A default investment fund (if you don’t want to choose)
For some, this type of pension provides reassurance, but as with any pension, there are pros and cons and suitability is also based on your attitude to risk among other factors.
No matter what type of pension you’re considering, our advisers will be happy to help you.
Like all investments, pensions can go up or down in value depending on each investment’s performance.
Risk Warning
The information contained in document is for guidance only and does not constitute advice which should be sought before taking any action or inaction.
