What Is the Transfer Value of a Pension

Hundreds of thousands of pension transfers take place each year, signalling a significant movement of retirement funds across different schemes. You’re likely considering the implications of such a decision on your own financial future.

Understanding the transfer value of your pension is a vital part of this process, and it’s not as straightforward as you might hope. This important sum is the amount your pension provider will offer you to move your current pension benefits to another plan. As you weigh the pros and cons, remember that this value is not merely a reflection of your total contributions but is influenced by a complex array of factors, including market conditions, underlying investments, and the rules of your existing pension scheme. Some of these factors may significantly impact the value of your pension if you transfer.

You must understand the nuances of transfer values and how they can affect your retirement strategy. This understanding will position you to make decisions with an informed mind; making the wrong decision without fully understanding your scheme could cost you thousands.

How is the transfer value and fund value different?

The transfer value of a pension is the sum you can relocate to a new scheme, often differing from the fund value, which represents the current worth of your savings without considering potential penalties or lost bonuses.

For defined contribution plans, the fund value is straightforward—it’s the total of your contributions plus any investment gains. However, the pension transfer value may factor in charges for leaving the scheme early.

In defined benefit schemes, the disparity is more pronounced. The CETV reflects an estimate of the present value of future benefits you’re giving up. It’s a complex calculation that considers your age, salary, scheme rules, and actuarial assumptions.

What is the cash equivalent transfer value?

As you consider the difference between transfer value and fund value, it’s also important to grasp the cash equivalent transfer value (CETV), if you have a defined benefit scheme. The CETV is the sum offered by your defined benefit pension scheme if you opt to transfer out, reflecting the value of your pension savings with another provider. This figure isn’t set in stone; it’s an estimate influenced by variables like age, internal scheme factors, gilt yields and life expectancy, among others.

When seeking to transfer a defined benefit scheme, you must engage with a Pension Transfer Specialist if your CETV is above £30,000. This is because defined benefit schemes are more complex than defined contribution schemes and, therefore, need more consideration.

Could my transfer value change after I decide to transfer?

When you commit to transferring your pension, it’s important to recognize that your transfer value may fluctuate due to market conditions and scheme rules before the completion of the transfer process.

As investment values change, so can the amount you’re entitled to move. Market value reduction could apply, particularly in with-profit funds, affecting the sum you receive.

It’s a financial reality that values change all the time, and these variations can occur right up to the point of transfer. To safeguard your interests, stay informed about the current market trends and understand how they might impact your pension’s transfer value.

Transfering a pension can often take weeks from the moment paperwork is submitted and markets can change a lot in this time.

If you wish to ‘lock in’ a transfer value, you could change your assets to cash before the transfer, which would avoid any market fluctuations.

How is a pension transfer value calculated?

You need to understand that calculating the transfer value of your pension depends on whether it’s a defined contribution scheme or a defined benefit scheme.

For defined contribution schemes, the transfer value is typically the current value of the funds you’ve accumulated.

In contrast, for defined benefit schemes, the calculation is more complex and can change dramatically over time. A recent example is CETV values, which during 2020-2021 were up to 40% higher than they are today (Feb 2024). This is due largely to gilt yields moving from historical lows of below 1% to over 5% in a matter of months.

Defined Contribution schemes

Calculating the transfer value of a defined contribution pension scheme involves assessing the current fund value and considering whether the fund has bonuses added.

Unlike a defined benefit scheme, your pension pot in a defined contribution plan reflects contributions made over time plus investment returns.

When you opt to transfer your pension, the transfer value is typically equivalent to the current value of your investments within the scheme.

There are some schemes however, such as with profit funds that include a bonus on top of the fund value. This bonus is not guaranteed in most circumstances and can be held back if market conditions aren’t favourable. Always check what the actual transfer value rather than just looking at the fund value.

Defined benefit schemes

Building on the understanding of defined contribution schemes, it’s essential to grasp how pension transfer values are calculated within defined benefit schemes. In these schemes, the process involves a more complex assessment of long-term financial promises rather than simply the sum of contributions and investment returns.

For final salary schemes, the final salary pension transfer value is an estimate of the present value of the guaranteed income for life you’re entitled to upon retirement. Actuaries use a defined benefit pension transfer calculator considering your age, expected retirement date, and life expectancy.

An enhanced transfer value may be offered to incentivize the transfer out of the scheme. However, it’s important to assess whether the transfer value adequately compensates for the security and benefits you’re giving up.

How long does it take to transfer a pension?

The duration of a pension transfer can vary, typically ranging from several weeks to a few months, depending on multiple factors such as the type of pension scheme and the responsiveness of the providers involved. When you ask for a transfer value, it’s important to understand that this figure is a snapshot based on the fund value at the time of the request, and it can fluctuate due to changing investment values.

To ensure a timely pension transfer, it’s advisable to be proactive in your communications with both the transferring and receiving pension providers. Delays can occur if there’s a lack of timely response or if additional information is required. There can be a lot of administration involved, and people often find it more efficient and less stressful to engage with a financial adviser.

Where is the best place to transfer a pension to

When considering the best destination for your pension transfer, it’s essential to weigh various factors, including the financial stability and performance record of the receiving scheme, to ensure alignment with your retirement goals and financial security.

Choosing a pension provider for your new pension requires careful scrutiny. The pension provider should offer a robust platform that aligns with your investment outlook and retirement timeline. It’s not merely about transferring to another pension scheme because you’ve heard it’s good; you must consider the long-term implications, such as fee structures, service levels, and fund options that match your risk tolerance.

Consulting with a pension advisor becomes indispensable here. They can dissect the nuances of your current pension, elucidating the complexities behind the transfer value and guiding you towards a decision that balances immediate financial benefits with sustained growth potential.

Help with transferring pensions with financial advice.

Navigating the complexities of pension transfers necessitates professional financial advice to ensure you maximise the transfer value while aligning with your retirement objectives. When considering a transfer, it’s not just about comparing the fund value with the transfer value but also understanding the implications of potential transfer incentives and the long-term impact on your retirement income.

I have been an independent financial adviser for over 20 years and have helped many people consolidate or move their pensions. The reasons for people wanting to move are many and varied from wanting better performance to lowering annual costs or reducing administration.

I have access to the whole pension market and can, therefore, recommend a suitable home for your pensions which aligns with your needs.