Record numbers of people have been transferring out of their defined benefit pension schemes in exchange for a fixed pot of money known as the CETV, or cash equivalent transfer value.
But more recently values have, in some cases been declining slightly. So what’s in store for pension transfer values in 2022.
Cash Equivalent Transfer Values
A CETV is a lump sum which is meant to be equivalent to what it would cost you to buy the same pension income that the scheme would have provided you, based on your age, health, final salary pension entitlement and other factors.
If you agree to take your employer’s pension scheme up on a CETV, you receive the sum of money on offer. This is known as a final salary pension transfer. You then use the pot of money you get to provide a retirement income instead of receiving a pension from your company. In most cases, you’re likely to be worse off if you transfer out of a defined benefit scheme to a defined contribution scheme.
The Financial Conduct Authority (FCA) and the Pensions Regulator (TPR) believe that it will be in most people’s best interests to keep their defined benefit pension. If you transfer out of a defined benefit pension, you can’t reverse it.
All pension scheme providers will calculate transfer values differently; there is no ‘one size fits all’ approach to these calculations. Plus, very few schemes will publish their precise calculation method.
However – as a starting point – they will calculate your CETV by identifying the cash amount needed to buy the final salary scheme benefits if invested on the day of the calculator.
This will be influenced by several factors, including:
- Retirement age
- The rules in place with the scheme provider
- How well the scheme provider is performing
- How much you plan to be paid every year in retirement
- Life expectancy
- Marital status
- The current cost of living
- Scheme investment costs and returns
In order to calculate a CETV, the trustees revalue the pension from date of leaving, to date of retirement, using inflation assumptions. They then capitalise the income using interest rate assumptions and finally discount this back to the present day using investment return assumptions.
The CETVs of pensions have risen steadily over the past few years, due in part to low-interest rates and the rise in pension schemes looking to reduce their liabilities. Low gilt yields have meant that companies have found themselves unable to afford the pension benefits that they have promised. Sometimes even encouraging employees to transfer out of their schemes.
CETVs are affected by inflation and annuity rates. Currently, assumed investment returns are low, which means CETV values are high. However, since mid-December, the XPS transfer value index has been dropping, due to a rise in the value of gilt yields. The drop so far is fairly small, meaning transfer values are still high, but it offers an indication of what may happen during the following months. The fall was largely due to a continued increase in gilt yields over the course of January and came despite the rises in inflation expectations.
Should You Transfer Now?
It is a good idea to check your scheme’s current pension transfer value, even if you are not sure if you want to transfer. Most schemes will allow you to check the value once a year at no cost or commitment. If you request more than one CETV in a twelve-month period, there will usually be a charge.
And importantly remember that the general advice is always not to attempt to try to ‘time the market’ in respect of a transfer value. Your CETV could rise, or it could fall.
Timing the market is almost impossible and any decision should be based on whether your current CETV allows you to meet your goals.
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