Pension Transfer Values

There are many good reasons for wanting to transfer your pension from one provider to another, including lower costs, wider investment options or simply to bring all of your pensions under one umbrella.

In this article we’ll look at how pension transfer values are calculated, how the type of pension you have affects these calculations and what you can do with your pension transfer value once you have it.

What is the transfer value of a pension?

Your pension transfer value is the amount of money that your existing pension provider would pay to your new provider, should you decide to transfer your pension fund to a different scheme. It’s not always easy to get an accurate pension transfer value as it will be calculated based on many different factors, including the type of scheme you’re currently invested in.

What’s the difference between the transfer value and fund value?

For a defined contribution pension pot, the pension fund value is simply the value of the pot’s investments at any given point. The transfer value is the value that would be transferred if you were to complete a pension transfer to another scheme. In most cases, these two values should equal each other. If you ask for a transfer value quote then keep in mind that it is not guaranteed – it will be an estimate and is subject to change in line with investment performance up until the date your funds are actually transferred.

It is also important to note that, depending on your pension plan, your transfer value could take into account exit charges and/or a Market Value Reduction (MVR) which will reduce the transfer value when compared to the fund value. However, some schemes offer final bonuses (also known as terminal bonus)’ which increase the value of your transfer value. It is important to examine the transfer value of your pension carefully and to fully understand why it does or doesn’t match your fund value.

Is it the same as the cash value?

No, not as such – this term is referred to more in relation to final salary pensions. For defined benefit schemes, where your pension on retirement is based on your salary and time in employment, it’s a little more complex. You won’t have a pension pot in the same way as you would under a defined contribution scheme – instead you are paying in every month on the promise of a guaranteed income for life when you retire.

As such, your pension transfer value can’t simply be a reflection of the fund value at any point in time, it has to be calculated as a cash equivalent transfer value – sometimes called a cash value or CETV. The CETV is the amount that your current provider would pay into your new scheme should you decide to transfer and is an estimate of how much you would need to generate the equivalent income on retirement.

NOTE: this is not a guarantee. With a defined benefit pension you are protected from fluctuations in the stock market, but once you transfer out into a defined contribution scheme and start investing in, you expose your pension fund to risk.

As long as you are not still an active member of the scheme, the CETV is guaranteed for three months, so you have time to consider your options without the risk of the transfer value going down in the meantime.

How is a pension transfer value calculated?

If you have a defined contribution pension you can ask for your pension transfer value from your provider at any time, or look at a recent pension statement. The transfer value will be calculated based on the value of the fund at the point of transfer.

For a defined benefit scheme, the calculation of the CETV (cash equivalent transfer value) is more complex. Because the value of your pension isn’t based on the value of investments, there are a lot of factors that need to be considered to estimate the value of the fund. These include specifics to your scheme, such as levels of employer and employee contributions, the scheme’s retirement age, and how long you contributed for. They also include personal lifestyle factors such as:

• Your marital status
• Your age
• Your life expectancy

Wider economic factors can also play a part, for example the interest rate hikes of 2022 caused a big drop in average transfer values. As a result, a basic pension transfer value calculator isn’t really appropriate for this type of retirement scheme. The smart move is to speak directly with a pensions advisor who has experience in this area first.

Incentives for transferring out of your defined benefit pension

You may also find that the motivations and funding position of your current provider can affect the transfer value you’re offered. Many defined benefit schemes, worried about having the finances in place to support payouts, offer transfer values much larger than the fund value as an incentive for members to transfer out.

This is sometimes called an enhanced transfer value or transfer incentive, and these high offers led to a surge of people transferring out of their final salary schemes over recent years. Make sure to consult a pensions advisor, even if your offer seems very high, as it still might be better for you to stay in the scheme and take the longer term benefits. It is also important to note that depending on the transfer value of your defined benefit pension, you may be legally obliged to seek advice.

What can you do with your pension transfer value?

Once you understand your pension transfer value, you cannot simply cash in your pension transfer value and have the money in the bank, you have to use it to either purchase a new pension or, if you are ready to start taking an income, set up a pension drawdown scheme.

Whichever type of pension you had originally, you will normally have to transfer into a defined contribution scheme. You cannot transfer from a defined contribution scheme into a defined benefit scheme.

The new scheme could be:

• A standard personal pension
• A self-invested personal pension (SIPP)
• A stakeholder pension
• A different workplace pension

If you are transferring more than one pension at the same time, you might choose to combine them into one new pot, or you might opt to transfer a single pension into another existing scheme in order to simplify your investments.

It’s worth noting that in the majority of cases it makes most financial sense NOT to transfer out of a defined benefits pension scheme. The benefits attached to these pensions, sometimes known as final salary schemes, are excellent compared to defined contribution schemes, guaranteeing you an income for life rather than drawing an income from a finite fund.

It’s really important that you take proper advice before you make a transfer, as you can’t change your mind once you’ve proceeded. In fact, if the value of your defined benefits is calculated as more than £30,000, you are legally required to take regulated financial advice and to provide evidence of this to a new provider.

Speak to a pension transfer advisor

Understanding the transfer value of your pension is a complex business and it’s a big decision to consider moving to a different scheme, especially transferring out of a defined benefit pension. You may like the idea of streamlining all of your pensions into one pot, but there is a lot more to consider than ease of management.

Fortunately you don’t have to do this work by yourself. A pensions advisor can review all of your current pension schemes and help you weigh up the pros and cons of each, and the benefits to be gained by transferring. Give us a call on 0808 189 0463 or make a quick online enquiry and we can match you with an expert pensions advisor who will be able to carry out a free pension review and help you make the best decision for you.