What transfer value options are available to members?
In this section we will look at the transfer value option available to members.
What is a transfer value?
The term transfer value is used to describe the cash value of a pension fund when it is moving from one pension scheme to another.It is also known as a Cash Equivalent Transfer Value (CETV)
Why would a member want to transfer pension benefits?
Members want to transfer the value of their pension benefits from one scheme to another for various reasons. The most common are described below:
Portability – It’s not very often that people stay with the same employer all their working life so people want to move their pension with their job. A pension scheme is an important part of a remuneration package and the new scheme may provide for better treatment of the transferred benefits. The new scheme may have better terms than the old scheme for active members but that doesn’t mean it is necessarily a good idea to transfer the pension.
Better returns or investment choices – The new scheme may have a wider choice of investment funds or investment managers, the investment returns may be better than those currently in place. It is essential that the member understands the choices and whether they are suitable for his or her aims.
Flexibility – The current scheme may not offer the new flexibilities available to members age 55 and over.
Cost – If a member has to contribute towards the running costs of a scheme, charges in a new scheme may be lower.
Consolidation – if a member has several pensions from different jobs, he or she may want to put them all in one place.
How is a transfer value calculated?
The calculation depends on the scheme benefit basis.
DC scheme – The transfer value is based on the value of the fund when disinvested. For this reason any transfer value quoted cannot be guaranteed and the amount actually paid out could be lower or higher than previously quoted.
DB scheme – The transfer value calculation is much more complicated and the trustees take advice from the Scheme Actuary on various assumptions used. This type of scheme aims to provide a set level of pension at retirement no matter how the scheme investments perform. The transfer value is the best estimate of the cost of providing the benefits for that individual member based on age, service etc. The transfer value also has to take into account the scheme’s investment strategy, how the trustees intend to invest over the lifetime of the deferred member.
If a scheme is underfunded a reduction may be applied to the transfer value. In this case it may be better for the member to wait.
The transfer value quoted is guaranteed for a period of 3 months from the date of calculation and must be received by the member within 10 working days.
What does the process involve?
In most cases when a member leaves the scheme they are advised if they have the option to transfer but the transfer value amount is not actually calculated.
The member may receive an option form which includes a tick box to request a transfer value. If not a member must request a transfer value. Sometimes the request will come from an IFA or the member’s new scheme, in which case the information cannot be released to anyone apart from the member unless they have a signed letter of authority stating who it can be released to.
The transfer value quotation will include all necessary forms for the member and the new provider to complete in order for the transfer to proceed. The transfer value quotation should also include a warning from the Pensions Regulator about pension scams.
At this time, the member may wish to take regulated financial advice to ensure they understand what benefits they are giving up and what benefits they will receive.
For DC benefits, the member’s fund will need to be disinvested before the transfer value can be paid to the new scheme or pension provider.
A few points of which the member should be aware:
To what can a transfer value be paid?
A transfer value can only be paid to a scheme registered with HMRC, these include:
A transfer value may also be paid to a Qualifying Recognised Overseas Pension Scheme (QROPS). The scheme must meet certain HMRC conditions to be classed as an authorised payment.
If a transfer value is paid to a scheme that is, neither a registered scheme nor a QROPS, then it is classed as an unauthorised payment carrying a 40% tax charge for the member.
Additional tax charges may also apply.
What are Pension Scams?
There are two main types:
Firstly, Pension Liberation (also known as trustbusting) scams are where pension benefits are transferred to an arrangement that allows the member access to their funds before age 55.
In rare cases such as terminal illness it is possible to take benefits before age 55 but in most cases the promise of being able to release funds before then is a scam and will result in tax penalties. These scams should not be confused with pension unlocking which allows a person aged 55 or over to release up to 25% of their pension fund as a tax free cash sum.
There are companies advertising that if a transfer value is paid to them they can convert it to immediate cash for the member due to a legal loop hole. This loop hole does not exist!
It is illegal.
If the member is being misled, some key consequences of transferring to one of these arrangements include tax liability, fees incurred and the remainder of their money may not be appropriately invested.
Secondly, there are scams that induce members to transfer their benefits to a scheme where they can make questionable investments that will apparently provide good investment returns. However, once transferred their money just disappears.
People are being targeted via websites, emails, text messages and cold calls. Professional advice should be taken before considering entering into discussions with these companies and when dealing with transfer requests, professionals and trustees can watch out for things such as:
The Pensions Regulator website has a lot of information and various leaflets.
If anyone is concerned or has been approached for this type of transfer they should contact the Action Fraud line on: 0300 123 2040.
Remember - If something sounds too good to be true it usually is!
Advantages of Independent Financial Advice
| LEAVING OPTION | ADVANTAGE |
| If a member is considering opting out of a scheme where both the member and employer contribute and replacing it with a personal pension plan. | An IFA would be able to compare the two pension arrangements and explain what the member might lose or gain. |
If a member is planning on transferring from one Defined Contribution scheme to another, in particular if the member is within 10 years of wanting to access these benefits. | An IFA will help the member compare investment vehicles, terms and conditions and the charges between each arrangement to help the member decide which represents the best deal for him or her personally. |
| If a member is planning any kind of transfer, he or she should also consider benefits other than pension such as death benefits. | An IFA will be able to compare all the benefits and tell the member what he or she might lose as a result of transferring to another arrangement including any lump sum death benefits and spouse’s / civil partner’s pensions. |
Don’t forget – If a member is considering transferring from DB to DC with a fund value of over £30,000 then they must take financial advice from a regulated adviser and the trustees must check that this has been done.
So which option is better?
The decision will depend on the member’s personal circumstances.
TRANSFER VALUE
How generous is the transfer value?
The member should assess and compare the benefits left in the old scheme with benefits offered in the new scheme.
LEAVE THE BENEFITS IN THE SCHEME
For members of DB schemes, remember that the amount of pension at the leaving date is known and:
More than two years’ pensionable service and over age 55?
In addition to a Deferred Pension or a Transfer Value, if the member is over age 55 there may also be the option to access benefits early.
For members of DB schemes, permission will normally be required from the employer if an active member wishes to retire early.
Contributions will cease and the pension will be lower than at Normal Retirement Age as it will be paid for longer.
For members with DC benefits they must be told about their options when they are approaching age 55.
The benefits available are explored in more detail in the module "Pension Scheme Retirement Benefits”
