Pension Transfer Values Sky High

Pension Transfers

Members of most private sector ‘defined benefit’ schemes have the right to exchange their future pension benefits for a cash lump sum. Quite recently, cash lump sums offered to individuals looking to cash in final salary pensions have jumped to record highs.

Members of defined benefit pension schemes receive an indexed income for life from their scheme. However. increasingly we are seeing many members choose to cash in their benefits and transfer their lump sum into a Self Invested Personal Pension (SIPP).

SIPPs offer significantly more flexibility than conventional defined-benefit pensions on things such as lump-sum access, death benefits, investment control and consolidation.

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Cash Equivalent Transfer Values

A cash equivalent transfer value (CETV) is the cash value placed on your final salary pension. It is the amount that is available to transfer to an alternative pension arrangement, in exchange for giving up your income rights under the final salary scheme.

How is a CETV calculated?

The CETV is calculated by working out the lump sum which is considered equivalent to the member’s current ongoing benefits. We are currently seeing schemes offer exceptionally high CETV’s for a number of reasons.

How much can I expect in exchange for my pension?

With defined benefit pension schemes, CETV’s are commonly a 20-25 times multiple of your promised annual scheme income. Some are up to 40 times.

For example, a person with a promised annual income of £40,000 could expect a CETV in the region of £1,000,000.

Company deficits

A pension deficit is a situation whereby a salary-related pension scheme doesn’t have sufficient assets to pay for all its future liabilities – notably pension payments to retired members. Companies are finding it harder than ever to maintain their commitment to pay pension benefits as life expectancy increases, given that the pension will be paid for a longer period of time.

 

A headline from the Guardian Newspaper Tue 14 Apr 2020.
Interest rates

In addition, as interest rates reach record lows, the schemes must earmark more funds for each individual member as the conventional approach of purchasing UK government Gilts is becoming less of a viable option, which again results in higher transfer values.

A graph showing the change in the Bank of England base rate since 1975.
Summary

The current economic climate is providing an opportune time to transfer your pension to a SIPP. To find out more information about your pension, please click here to arrange a complimentary review with a specialist.

 

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