Transfer valuation of final salary pension
Discussion
I have a final salary pension from a PLC I used to work for at the early phase of my career.
Let's say the pension is currently worth £25k per year, index linked, paid at 60. There is a 50% spousal pension paid if I die before my wife. I'm currently in my late 40's. So the value of the pension will continue to increase each year up to age 60.
The pension scheme is close to being fully funded, although it has long since closed to new members.
So I think it is a good scheme. And when the LTA was in place, it suited me to keep the final salary because it was "valued" by HMRC at x20 the annual benefit, which I thought was below the "real" notional value. And as I always intended to continue paying into my own SIPP, and would exceed the LTA anyway, keeping the final salary component would understate the total value and hence minimise the extra tax I would need to pay once I started draw down.
But now the LTA has been removed (at least until Labour are elected), that situation might have changed. With my wife's pension, my own SIPP and other personal savings, I probably won't need to rely on my final salary pension. And as pensions are currently excluded from IHT it might be better to transfer the final salary pension into "cash" (e.g. investments) so it can eventually pass as part of my estate without 40% IHT.
Looking online, there are plenty of "on-line calculators" which suggested a "cash equivalent transfer value" (CETR) would be maybe x30 (or more) the annual benefit. So I contacted the pension trustees and asked for my transfer value, and I was offered pretty much exactly x20 the current annual benefit.
It seems the trustees are able to define their own method for calculating the transfer values they offer, and clearly here the actuaries involved don't want to incentive funds leaving. And whilst I don't plan to ever buy an annuity, even with the recent increase to interest rates, I couldn't buy an annuity on the open market which offers the current benefit for anywhere close to as cheap as x20. I think x35 would be closer to the actual value. So I think the transfer value being offered isn't a fair reflection of the true value of the pension.
I also realise, should I ever want to proceed, I would need professional advice (which might be expensive, and very difficult to obtain). And there is no guarantee that pensions will continue to be excluded from IHT.
But, does anyone know if a CETR can be challenged? At present, I've been told the trustees have the legal right to set the transfer value calculation and it isn't open for discussion or review. And the fact that the value offered is almost exactly HRMC notional value of x20 is coincidental.
Let's say the pension is currently worth £25k per year, index linked, paid at 60. There is a 50% spousal pension paid if I die before my wife. I'm currently in my late 40's. So the value of the pension will continue to increase each year up to age 60.
The pension scheme is close to being fully funded, although it has long since closed to new members.
So I think it is a good scheme. And when the LTA was in place, it suited me to keep the final salary because it was "valued" by HMRC at x20 the annual benefit, which I thought was below the "real" notional value. And as I always intended to continue paying into my own SIPP, and would exceed the LTA anyway, keeping the final salary component would understate the total value and hence minimise the extra tax I would need to pay once I started draw down.
But now the LTA has been removed (at least until Labour are elected), that situation might have changed. With my wife's pension, my own SIPP and other personal savings, I probably won't need to rely on my final salary pension. And as pensions are currently excluded from IHT it might be better to transfer the final salary pension into "cash" (e.g. investments) so it can eventually pass as part of my estate without 40% IHT.
Looking online, there are plenty of "on-line calculators" which suggested a "cash equivalent transfer value" (CETR) would be maybe x30 (or more) the annual benefit. So I contacted the pension trustees and asked for my transfer value, and I was offered pretty much exactly x20 the current annual benefit.
It seems the trustees are able to define their own method for calculating the transfer values they offer, and clearly here the actuaries involved don't want to incentive funds leaving. And whilst I don't plan to ever buy an annuity, even with the recent increase to interest rates, I couldn't buy an annuity on the open market which offers the current benefit for anywhere close to as cheap as x20. I think x35 would be closer to the actual value. So I think the transfer value being offered isn't a fair reflection of the true value of the pension.
I also realise, should I ever want to proceed, I would need professional advice (which might be expensive, and very difficult to obtain). And there is no guarantee that pensions will continue to be excluded from IHT.
But, does anyone know if a CETR can be challenged? At present, I've been told the trustees have the legal right to set the transfer value calculation and it isn't open for discussion or review. And the fact that the value offered is almost exactly HRMC notional value of x20 is coincidental.
Afaik the valuation given is just that and leaves no room for negotiation.
With increased interest rates over the past few years this too will have had an impact on the multiple offered.
The valuation also depends on how keen the scheme is to see you bought out.
I cashed in my DB scheme in March 2020 and received a multiple of just under x41.
In 2016 I received a valuation that gave me a multiplier of just over 20.
Out of interest two weeks ago I looked at one of those online calculators and the valuation seemed to be back around the x20.
That all said I guess there’s nothing to stop you going back and asking for an increased valuation ?
With increased interest rates over the past few years this too will have had an impact on the multiple offered.
The valuation also depends on how keen the scheme is to see you bought out.
I cashed in my DB scheme in March 2020 and received a multiple of just under x41.
In 2016 I received a valuation that gave me a multiplier of just over 20.
Out of interest two weeks ago I looked at one of those online calculators and the valuation seemed to be back around the x20.
That all said I guess there’s nothing to stop you going back and asking for an increased valuation ?
AIUI the x20 factor is based on bond yields (there was a time not too long ago when i think DB schemes were offering x40 because yields were so low).
You're correct that the Trustees have the right to decide how CETVs are calculated. However they don't just set arbitrary formulas or choose formulas that discourage people transferring. They have to be fair to the rest of the Scheme members and I think there is guidance/regulation from The Pensions Regulator on how CETV's are calculated
You're correct that the Trustees have the right to decide how CETVs are calculated. However they don't just set arbitrary formulas or choose formulas that discourage people transferring. They have to be fair to the rest of the Scheme members and I think there is guidance/regulation from The Pensions Regulator on how CETV's are calculated
alscar said:
Afaik the valuation given is just that and leaves no room for negotiation.
With increased interest rates over the past few years this too will have had an impact on the multiple offered.
The valuation also depends on how keen the scheme is to see you bought out.
I cashed in my DB scheme in March 2020 and received a multiple of just under x41.
In 2016 I received a valuation that gave me a multiplier of just over 20.
Out of interest two weeks ago I looked at one of those online calculators and the valuation seemed to be back around the x20.
That all said I guess there’s nothing to stop you going back and asking for an increased valuation ?
Interesting - thanks. A valuation of x41 would have been magic!With increased interest rates over the past few years this too will have had an impact on the multiple offered.
The valuation also depends on how keen the scheme is to see you bought out.
I cashed in my DB scheme in March 2020 and received a multiple of just under x41.
In 2016 I received a valuation that gave me a multiplier of just over 20.
Out of interest two weeks ago I looked at one of those online calculators and the valuation seemed to be back around the x20.
That all said I guess there’s nothing to stop you going back and asking for an increased valuation ?
Re asking for another valuation, I think I'm limited to one request per year. My current assumption is that, at anything around x20 it doesn't make sense to consider transferring it. I think they aren't likely to renege on paying their pension obligations, and the risks of moving are quite high. But at anything close to x30 I reckon it would be worth seriously considering.
Countdown said:
AIUI the x20 factor is based on bond yields (there was a time not too long ago when i think DB schemes were offering x40 because yields were so low).
You're correct that the Trustees have the right to decide how CETVs are calculated. However they don't just set arbitrary formulas or choose formulas that discourage people transferring. They have to be fair to the rest of the Scheme members and I think there is guidance/regulation from The Pensions Regulator on how CETV's are calculated
Thanks - I suppose that's also part of my reason for posting. I didn't have any independent benchmarks of what people are actually being offered, apart from the on-line calculators and checking what an annuity would roughly cost, to get an idea of the comparative value.You're correct that the Trustees have the right to decide how CETVs are calculated. However they don't just set arbitrary formulas or choose formulas that discourage people transferring. They have to be fair to the rest of the Scheme members and I think there is guidance/regulation from The Pensions Regulator on how CETV's are calculated
I did get a valuation back in 2018 where it worked out 33x with the company I was working for.
Recently that had dropped down to 22x when I retired and took out the annuity (pension)
This is due to gilt yields rising due to higher interest rates. If you wait a few years and interest rates fall then that multiple can go up. This would seem a better investment than transferring to SIPP right now.
Also note that if you are a deferred member then it can be less generous than an active member - this depends on the company scheme rules.
You would expect the value to be a bit higher given that the trust fund foregoes having to pay your wife 50% pension on your passing.
Disclaimer: I am not a financial adviser so these are my personal views and experiences.
Recently that had dropped down to 22x when I retired and took out the annuity (pension)
This is due to gilt yields rising due to higher interest rates. If you wait a few years and interest rates fall then that multiple can go up. This would seem a better investment than transferring to SIPP right now.
Also note that if you are a deferred member then it can be less generous than an active member - this depends on the company scheme rules.
You would expect the value to be a bit higher given that the trust fund foregoes having to pay your wife 50% pension on your passing.
Disclaimer: I am not a financial adviser so these are my personal views and experiences.
EddieSteadyGo said:
So it is sounding like the x20 perhaps isn't actually a "bad" offer, based on current conditions. Interesting.
Probably not a “ bad “ offer no and in line with what most have said. You’re also right in that you only get one valuation per year apparently - just looked at my letter.
EddieSteadyGo said:
Interesting - thanks. A valuation of x41 would have been magic!
But at anything close to x30 I reckon it would be worth seriously considering.
I’m also no expert and clearly any decision has to be yours alone based on what feels right for you and what other finances and plans you have in place etc but IF it were me and all things being equal waiting until your next valuation in 12 months time would seem to be sensible although I’m not sure it would have increased as much as x30 but conversely doubt it would have reduced either.But at anything close to x30 I reckon it would be worth seriously considering.
Yeah, my personal view is that interest rates (i.e. gilt yields) are going to drop as we get into 2024, possibly more quickly than some imagine. Ultimately we will likely just follow broadly what the US does, and I think Biden might prefer lower interest rates, and the resulting boost to the S&P500, which is going to help the average American feel a bit more wealthy, prior to the next presidential election.
So yes, a x20 valuation isn't sufficient to offset the risks. My personal gut-feel on the "breakeven" point for me personally is x26 valuation.
So yes, a x20 valuation isn't sufficient to offset the risks. My personal gut-feel on the "breakeven" point for me personally is x26 valuation.
omniflow said:
I'm sure there will be someone on here who will come along soon and give you the totally accurate answer, but my understanding is that transfer values are very closely linked to Gilt yields.
That’s what I understand. I transferred approx 5 years ago at a 42x rate. It was a no brainer at the time and I’ve since retired early which I probably would have struggled with if I hadn’t taken the CETV.EddieSteadyGo said:
Yeah, my personal view is that interest rates (i.e. gilt yields) are going to drop as we get into 2024, possibly more quickly than some imagine. Ultimately we will likely just follow broadly what the US does, and I think Biden might prefer lower interest rates, and the resulting boost to the S&P500, which is going to help the average American feel a bit more wealthy, prior to the next presidential election.
So yes, a x20 valuation isn't sufficient to offset the risks. My personal gut-feel on the "breakeven" point for me personally is x26 valuation.
If you live more than the 26 years it will have been the wrong decision?So yes, a x20 valuation isn't sufficient to offset the risks. My personal gut-feel on the "breakeven" point for me personally is x26 valuation.
Do what feels right for you and live long and prosper.
cliffords said:
If you live more than the 26 years it will have been the wrong decision?
Do what feels right for you and live long and prosper.
Maybe. As the pension is index linked, that account for one additional factor in favour of the final salary scheme. And the spousal benefit is another factor. And the certainty, as whatever else I do with the money, it will be far from a guaranteed outcome. Plus the main reason for transferring would be the IHT benefit to my children, and that could be removed at the stroke of a future chancellor's pen at any point over the next few decades. Do what feels right for you and live long and prosper.
But on the other hand, having direct control of the money is a big advantage, particularly since the removal of the LTA. And so I would be dependant on my own investment decisions, rather than someone else's, which I inherently prefer.
In 2020 my CETV multiple was 43X and seven figures. I’ve left the company so it’s differed. I’m 50 now and could have easily retired at the time if I could find an IFA that would recommend transferring out but none of them would, even when I demonstrated to them that I fully understood the risks involved and told them I was an insistent client. Brick wall with three IFA’s that specialised in pension transfers.
They all said the same thing, at 48 I was too young and couldn’t recommend the transfer.
The CETV is now 22 and nowhere near seven figures and not enough for me to retire on.
You might find it’s not possible at your age regardless of what you want to do.
They all said the same thing, at 48 I was too young and couldn’t recommend the transfer.
The CETV is now 22 and nowhere near seven figures and not enough for me to retire on.
You might find it’s not possible at your age regardless of what you want to do.
paralla said:
In 2020 my CETV multiple was 43X and seven figures. I’ve left the company so it’s differed. I’m 50 now and could have easily retired at the time if I could find an IFA that would recommend transferring out but none of them would, even when I demonstrated to them that I fully understood the risks involved and told them I was an insistent client. Brick wall with three IFA’s that specialised in pension transfers.
They all said the same thing, at 48 I was too young and couldn’t recommend the transfer.
The CETV is now 22 and nowhere near seven figures and not enough for me to retire on.
You might find it’s not possible at your age regardless of what you want to do.
Yep, exactly the same for me. My CETV was double what it is now back in Feb 2020, I was trying to transfer out of my company scheme to take advantage of it and make use of the more relaxed ways in which you could draw a personal pension. IFAs at the time were unwilling to assist and now my CETV has halved. I’m absolutely gutted about it.They all said the same thing, at 48 I was too young and couldn’t recommend the transfer.
The CETV is now 22 and nowhere near seven figures and not enough for me to retire on.
You might find it’s not possible at your age regardless of what you want to do.
It’s made the difference from potentially be able to retire at 55, to now having to work until at least 60.
craig1912 said:
That’s what I understand. I transferred approx 5 years ago at a 42x rate. It was a no brainer at the time and I’ve since retired early which I probably would have struggled with if I hadn’t taken the CETV.
This mirrors my experience exactly (except I got x43 
). There was actually a slightly higher valuation shortly beforehand, but it expired before I got my regulated advice sorted.It is indeed to do with bond yields, but that's the extent of my knowledge of the subject. But there should be potential for the valuation to rise (or of course fall). At x20 I may well not have cashed it in.
cliffords said:
I transferred mine in Jan 2022 at around 40 X. A ex colleague of mine in same employer got his figure in Jan of this year , at 22 X. Same age as me similar number of years in similar salary.
Interest rates, inflation , bond performance and appetite.
So the guy who got 40x last yearInterest rates, inflation , bond performance and appetite.
1)12k pension, indexed linked for life
So £13.3k now
A zillion £ a year @ age 80
2)500k to gamble in a fund
2) could well be £400k now..
Toss the coin
Good to have a mix of cash/db/dc
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