You are entitled to one transfer value quotation in each 12-month period (with some limited exceptions – notably if you are aged 60 or over and within 12-months of your Normal Retirement Date). If your pension scheme provides you with a transfer value quotation without your specific request, such as on leaving or redundancy, you may request another transfer value quotation within the same 12-months.
How is a transfer value calculated?
There are rules set down as to how your transfer value must be calculated, which, simplified, can be explained as follows:
- In order to place a value on your pension benefits, the scheme trustees who are responsible for the calculation basis of your transfer value looks at the pension benefits that you have earned up to the date of your redundancy (or more accurately – the date you ceased to be an active member of the pension scheme).
- Your pension benefits are then ‘projected forward’ to your Normal Retirement Age to get an estimate of what your pension benefits would be at that date. A monetary value is then placed on this - effectively the amount of ‘pension fund’ that would be needed in the future to provide you and your dependants with the projected level of benefits that has been estimated.
- This ‘future value’ is then discounted back to the present day (the date the transfer value is calculated) to arrive at a current value, which is termed the ‘transfer value’.
- If your pension scheme is in deficit, your transfer value may be reduced.
- Your transfer value should normally be guaranteed for 3-months.
In calculating your transfer value, the Scheme Trustees make certain assumptions (agreed by the trustees but with the guidance of the scheme actuary) which directly affect the viability of you transferring – these assumptions include what they think inflation and investment returns are likely to be, in the period between now and your retirement. These assumptions can change, which means that your transfer value can rise or fall once the 3-month guarantee has expired.
Where can I transfer to?
You can move your transfer value to any other registered pension scheme, or split it between different schemes. This will mean you have no pension benefits left with your ‘former’ pension scheme, as the transfer value must represent your entire benefits held within that scheme*. Whether to stay in your pension scheme, or whether to transfer out, is a major decision and not one that should be taken lightly.
Contrary to popular belief, there are as many good reasons to transfer out as there are to remain in your scheme and YOUR personal circumstances will play a big part in any decision.
As the pension benefits provided by employer’s pension schemes vary considerably, the decision whether to transfer depends upon a whole number of factors including the generosity of the transfer value offered. Any decision to transfer also depends upon a range of personal and economic factors which must all be taken into account when deciding which option is best for you.
*If you had previously 'opted-out' of your employer's pension scheme and had pensionable service before 6th April 1988, your scheme may choose to retain that part of your pension benefit and pay you your pension at your Normal Retirement Date.
Reducing your transfer value
Your transfer value may be reduced where the pension scheme is in deficit. This is allowed by law so that the pension benefits of the remaining members are safeguarded. Many schemes are currently reducing transfer values because of pension scheme deficits. Not all schemes that are in deficit reduce transfer values, as the trustees will have taken advice on the size of the deficit and the number of requests being made to transfer out.
Example of a reduced transfer value
Mr P Evans is 53. He has recently been made redundant and has been told his pension was worth £5,000 p.a. at the date he left service.
His transfer value is £53,645 but the scheme is in deficit and his transfer value is reduced to £40,233, which represents 75% of his actual transfer value.
He could transfer out now taking the £40,233 to another scheme; he could wait until the deficit is reduced in whole or part; or he could wait until Normal Retirement Age to get his pension. There are risks associated with each of these options.
What is a Transfer Value Analysis (TVAS)
If you go to a specialist financial adviser with details of your transfer value, they will perform a Transfer Value Analysis Service (TVAS) on your behalf. This is a highly skilled area – it’s about as specialist and complicated as pensions advice gets, but a good adviser should talk you through it, step by step, and in plain terms.
A transfer analysis looks at some of the options available to you if you are considering transferring-out of your employer’s pension scheme. This will include a transfer to a Personal Pension Plan or similar arrangement, such as a Section 32 Buyout.
The analysis will also show how well your new pension would have to perform in terms of future investment performance, to be able to provide you with at least the same benefits you would be giving up in your existing pension scheme. Any recommendation will need to take account of your own personal circumstances and considerations (and that of your dependents).
Your adviser will explain the difference between each transfer option and the advantages and disadvantages associated with them all – including the merits of remaining in your pension scheme.
A transfer analysis may not necessarily examine the alternative option of transferring to another employer’s scheme in the event of you managing to secure employment after being made redundant. This is because comparing one employer’s scheme to another is highly complex as they are so varied in form and in the benefits which they offer.
This Quicknote shows that it is essential that you need to understand what your transfer value represents in terms of your pension benefits. It is important that you get a full analysis of all of the options available having been made redundant, at which point you became a preserved member.
People seldom have identical pensions and you should avoid drawing comparisons with colleagues whose circumstances may at first appear the same but could emerge as having significant differences.
This Quicknote forms part of our Module about Redundancy and should be read alongside the other Factsheets and Quicknotes in the series.
This is not an authoritative document. Seek professional advice from an appropriately experienced and qualified adviser.
Redundancy: Transfer Value v1.3 Preserved
Last reviewed 12/08/2009