Pension Transfer Value
Comprehensive guide on what pension transfer value means and the steps you’ll need to take to determine the transfer value of your pension
Written by: Tony Stevens | Late update: April 2020
What does pension transfer value mean?
For a defined benefit scheme, the transfer value of your pension simply means the cash amount that your pension pot would be worth if you were to have it transferred it to a different provider or scheme.
Things work differently for defined contribution schemes as the transfer value for these products would be the value of the investment. With a defined contribution pension the transfer value will often be lower than the fund amount, meaning you’ll have less in your pot if you move to a different provider.
What is the difference between pension fund value and transfer value?
Your ‘pension fund value’ is simply the official term for the amount of money available in your pension pot at any given time, i.e. what you will be able to withdraw in retirement. This contrasts with the pension transfer value, which is its equivalent amount if moved to another provider.
What factors affect pension transfer values?
Customers often want to know what drives pension transfer values, and the answer is not always straightforward. It depends on several factors, including:
- Your age
- Your scheme’s retirement age
- The current cost of living
- Life expectancy
- Whether you’re married or single
- The current gilt values
How is it calculated?
For a defined benefit scheme, actuaries and other pensions experts calculate it by taking all of the above factors into account along with the pension transfer value index, which tracks transfer values of pensions in real time. When this index is high, higher transfer values are available, meaning you’ll get more for the money in your pension pot when you move it into another scheme.
To work out yours, your advisor will first need to know whether you are enrolled on a Defined Contributions (DC) scheme (such as a final salary pension) or a Defined Benefits (DB) scheme (such as a personal pension, SIPP, stakeholder pension etc), as the calculation and will be different in each case.
Transferring out of a Defined Contributions Scheme
If you’re enrolled in a Defined Contributions scheme, you will first need to acquire a transfer value from the provider. This can usually be done quite easily by contacting the scheme administrator or by simply looking on your statement. Once you have the figure, you can start to compare products with a view to making a switch.
Transferring out of a Defined Benefits Scheme
If you are thinking of transferring out of a workplace Defined Benefits scheme, the process and calculation is more complicated. You will need to acquire something called a Cash Equivalent Transfer Value (CETV) certificate before you can go ahead, and you will need to appoint a financial advisor to do.
In most cases, it won’t be worth moving out of a Defined Benefits (DB) scheme because they are guaranteed for life and the benefits offered by many workplaces using these schemes cannot be matched. However, low interest rates have led to historically high transfer values for those exiting final salary schemes, and there have been cases of ailing schemes offering incentives in the form of generous transfer values to encourage people to move on to Defined Contributions (DC) schemes if they are struggling to honour their final salary commitments.
What is meant by ‘pension cash equivalent transfer value’?
Pension cash equivalent transfer value (CETV) is the term used to describe the transfer value when switching from a Defined Benefits (DB) scheme to a Defined Contributions (DC) scheme. CETV pension transfer is a bit more complicated, because of the very different ways DB and DC schemes are structured.
DB schemes are guaranteed for life and paid in installments like a salary, so it’s necessary to work out a cash equivalent before a meaningful comparison can be made with a DC scheme in a process called CETV pension transfer valuation. The CETV is expressed as a lump sum, and is based on a set of assumptions about how long you’re likely to live after you retire, the impact on inflation and other factors.
How to work out pension transfer value
Calculating it is a complex task with a great many changeable factors to consider. While you can certainly use a calculator to get a rough idea, we would always recommend you take professional advice, and refrain from making any decisions until you have been given a definitive figure, along with bespoke guidance tailored to your needs and circumstances.
When working it out, it’s also important to remember that the cash amount is only one part of the picture, and even if the transfer value looks good, you should always get professional advice to ensure you are not losing any benefits that may be of worth more to you in retirement than a larger pension pot and any tempting looking features being offered by a newer scheme. A good list of questions to ask any new provider can be found here.
Schemes of all types may have some benefits that it isn’t possible to transfer, so don’t forget to seek advice on this point. The pensions advisors we work with are highly experienced in this analysis, and will be happy to talk you through the options.
What can I do with my pension transfer value?
Once you have a clear idea of your pension’s current transfer value, you have a few options:
- Combining pots within one platform to simplify your pension admin and reduce fees
- Switching to a different type of scheme, e.g:
- A new employer’s workplace pension scheme
- A personal pension scheme
- A self-invested personal pension (SIPP)
- A stakeholder pension (SHP) scheme
If you are in a defined benefits scheme and/or the value of your pension is £30,000 or higher, you will legally have to consult a regulated financial advisor to oversee the transfer to any of the above schemes – call us on 0808 189 0463 if you’d like us to put you in touch with one to help you through the process.
You cannot switch to a Defined Benefits scheme from any other type of scheme, because these are only available through certain workplace schemes and are based on how many years of service you’ve provided.
Why is my pension transfer value higher than fund value?
UK pension transfer values on final salary pensions are unusually elevated, and you may find that you could be offered a surprisingly large cash equivalent value for your defined benefits scheme. So why are pension transfer values so high at the moment?
The answer lies mainly in the value of government bonds called ‘gilts’ that most final salary schemes have invested in to honour their commitments. When interest rates are low, gilt yields are high, which will increase the transfer rates, so the historically low interest rates we have seen in recent years are a key factor in transfer values increasing.
When can I transfer my pension?
Depending on the type of scheme you’re enrolled in, it’s usually possible to transfer your pension benefits into another scheme at any time.
You can do this up to one year before your expected retirement date, and in some cases, you can even switch to a new scheme once you’ve started drawing retirement benefits. The experts we work with can help to advise on when you can make a transfer.
Where can I find a calculator?
There are a few free tools available on the web that can provide an estimated pension transfer value, however we would advise you use these only as a very rough guide, while an accurate figure can only be provided by your scheme administrator or a qualified financial advisor.
Is transfer value the same as pension pot?
No, these are two different values, reflecting the fact that the value of your pension pot will often differ from the cash transfer value of your pension.
What pension transfer value charges are there likely to be?
Having yours calculated won’t incur any charges, but there will be fees to pay if you decide to transfer. Read our guide to pension transfer fees.
Speak to an expert
If you’re thinking about having your pension transferred or just want access to professional advice, the pensions experts we work with are ideally placed to help you at every stage of the process. For an initial consultation at no cost to you, give us a call on 0808 189 0463 or make an enquiry here, and we’ll be in touch soon to discuss your requirements.