Enhanced Pension Transfers
If you have been part of a company pension scheme, specifically a Defined Benefit scheme, also called DB scheme, then you may have come across the term “Enhanced Pension Transfer”. The explanation of this is not always clear and we will be going into greater detail in this blog.
Background on Defined Benefit Pension Schemes
A Defined Benefit Scheme offers the employee upon retirement, a guaranteed income for life. They are often known as the “golden handcuffs” of pensions. This is due to the financial incentives being so good they tie the employee to the company for a stipulated time.
The offer / CETV (Cash Equivalent Transfer Value) can be:
- Transferred out of the scheme to another provider
- The employee can take a tax-free cash lump sum (up to 25%) and enter into the equivalent of the company annuity scheme
- Enter directly into the annuity scheme at a higher rate
The CETV is computed using a formula that considers a number of factors such as, historic salary, length of employment as well as the funding position of the pension scheme. It is as a direct result of the funding of the pension scheme whether the offer can be enhanced or reduced.
What is an Enhanced Pension Transfer Value?
Without stating the obvious an enhanced pension transfer is when the transfer value has been increased. This is usually due wanting members out of the scheme combined with the fact the scheme is well funded. Reasons for wanting members off the schemes books is quite simple. Originally when Defined Benefit schemes were setup people didn’t live as long and the schemes were well funded. Since then life expectancy has dramatically increased and due to financial markets crashing over the years and bad management the defined benefit scheme is dramatically underfunded and often running at huge deficits.
Does This Mean I Should Transfer?
Just because you have an enhanced pension transfer value it does not mean you should automatically be looking to transfer out. There are a number of factors to consider before deciding to potentially transfer or not. In most cases, it is best to stay within the scheme, however, if you do have an enhanced offer it would be sensible to evaluate the offer.
Seeking financial advice will allow you to start the process, gaining a full understanding of your total pension pot as part of your retirement income. This can be done before or after retirement age.
A good starting point is to speak to a Regulated Independent Financial Adviser such as ourselves at Harrison Brook. As stated it may well be the case that you are best off leaving your pension where it is, however, speaking to a financial adviser should be the first step. As you would be giving up protected rights any defined benefit scheme wanting to be transferred will need to go through a strict level of due diligence and rightfully so.