There may never be a better time to switch your Defined Benefits Pension Scheme
WHAT IS THE ‘CASH EQUIVALENT TRANSFER VALUE’ (CETV) AND HOW IS IT CALCULATED?
The cash equivalent transfer value is the expected cost to purchase the same benefits as a specified defined benefit pension scheme.
A final salary (DB) scheme member can transfer their pension away from one scheme into another pension. The cash equivalent transfer value is the expected amount that would be received by the receiving scheme on transfer.
There are four main steps involved in calculating the CETV
1. Calculating the preserved pension of the deferred member.
2. Revaluing the preserved pension to the normal retirement date using the statutory minimum rate of revaluation.
3. Dividing the revalued pension by the prevailing annuity rate showing the estimated cost of the benefits at normal retirement age for the member.
4. Discounting that back by an appropriate discount rate (usually prevailing equity rates if there is more than 10 years until the normal retirement date, and the 5-year gilt rate if there is less than 10 years until the normal retirement date).
Here is an example:
If the preserved pension is £12,000 per annum
If the minimum rate for revaluation is 5% for each tranche of the scheme and there are 6 years until retirement. £12,000 x (1.05)^6 = £16,081.15
If the prevailing annuity rate is 1% then the revalued pension may cost as much as the following at retirement assuming annuity rates are the same at the normal retirement date as they are today. £16,081.15 / 0.01 = £1,608,114.77
Discounting this figure back to the present day could cost based on a 5 year gilt rate 0.5%. £1,608,114.77 / (1+0.005)^6 = £1,560,704.46
The main reason for large transfer values being common is due to low gilt rates as shown in step 4.
Incorrectly, many individuals believe their cash equivalent values will increase over time, however, this may not be the case. A small change in the gilt rate will have a big impact on the CETV.
Bearing this in mind, even small changes in annuity rates, revaluation rates, and estimated discount rates can also make an impact and so whilst we we cannot be certain if rates and CETV's will go up or down in the future, we are absolutely certain that rates are very low right now, meaning there may never be a better time to take full advantage of our schemes than today!
If you have a pension in the U.K and have previously had it valued, it would certainly be worth asking for a value again now. If you have never had your scheme valued then you certainly should do so!
Please contact one of our PS & Partners Adviser's today if you have any UK pension scheme and we can help show you exactly what you have and what your options are so that you can make the right decision for you;