Final Salary Pension transfers

Judith2020

Hi there 
Bit confused re final salary pension transfers as my latest pension statement states my pension pot is £98k with a transfer value of £198k.  My question is if I transfer my pension to another scheme will my pension pot ( ie what I will eventually receive) be worth £198k just by transferring I am struggling to understand why the transfer value is c£100k more. If you do get the transfer value then surely everyone would be transferring their pensions over a number of years to get the highest value possible ready for when they draw their pension ?  Thanks in advance.  

ischofie1

Well I we’ll I’m confused as well. 

If it’s a final salary pension it will pay X amount per annum & there will be a transfer value for giving up this annual payment. 

No idea where the pot of £98K comes in as there is no pot. 

Marcon

Judith2020 said:

Hi there 
Bit confused re final salary pension transfers as my latest pension statement states my pension pot is £98k with a transfer value of £198k.  My question is if I transfer my pension to another scheme will my pension pot ( ie what I will eventually receive) be worth £198k just by transferring I am struggling to understand why the transfer value is c£100k more. If you do get the transfer value then surely everyone would be transferring their pensions over a number of years to get the highest value possible ready for when they draw their pension ?  Thanks in advance.  

There is no 'pot' with a DB scheme; just a transfer value. Sometimes employers offer 'enhanced' (?does that word appear anywhere?) transfer values, but not usually double the normal value!

Could you paste the relevant part of your statement here, obviously without any personal identifiers?

Otherwise, go back to the scheme administrators and ask them to explain.

xylophone

Bit confused re final salary pension transfers as my latest pension statement states my pension pot is £98k

https://www.pensionsadvisoryservice.org.uk/pension-problems/avoiding-problems/what-you-have-the-right-to-ask-your-scheme

You do not have a pot with a FS pension.

You have a promise to pay a defined benefit based on your final salary at scheme pension age.

If you wish to transfer out of your FS scheme, the scheme actuary will calculate what it might cost the scheme to pay you your pension at retirement for the rest of your life.

This is the cash equivalent transfer value.

If transferred to another Defined Benefit Scheme the CETV buys years in the new scheme - if transferred to a DC scheme the money would normally be invested in stock market based instruments of one kind or another. 

https://www.moneyadviceservice.org.uk/en/articles/defined-benefit-schemes

https://www.which.co.uk/money/pensions-and-retirement/company-pensions/defined-benefit-and-final-salary-pensions-ajvnw4q07rlm

Secret2ndAccount

There isn't a fixed format for pension statements. Each company lays it out differently and I found mine very hard to understand too. First thing to say is you don't have a pension pot with final salary schemes. It works like this: you pay in a monthly amount for a number of years while you are working. They pay out a monthly amount for the rest of your life when you retire. There are rules to calculate how much you get each year/month. Think about it. If it was a pot, it could run out, or there could be some left at the end. Neither of these is going to happen. It's just a commitment to pay a pension for as long as you live.

This is good for you, but scary for your pension scheme. They might have to pay you a pension of 7000 in year 1, then 7100 (inflation) in yr 2, 7250 in yr 3... and this could go on for 40 years or more. So it's no surprise that they would offer you an eye-watering amount of money to walk away. "We will give you 198k right now to go away, and never ask us for any more money." It's a good deal for them.

So, without knowing anything about your personal circumstances, or the ratio of the transfer value to the annual pension (it's called the CETV), the baseline advice is to stay in the scheme and take the annual pension. If you transfer out, you now have a finite pot of money which could run out. If you stay in, you get money every year for as long as you live, and it normally keeps up with inflation.

So what's the 98k number? Hard to know without seeing the statement. I know my pension scheme has two ways of valuing my pension entitlement - trying to put a number on my pot, even though there's no pot. In my case, like yours, one of the numbers is much bigger than the other. I get whichever is higher. For some employees, with different dates of service, the other number works out bigger, and that determines their pension.

Your pension does, invisibly, consist of two parts. Since you've paid in every month, the government sets a minimum standard for the amount you should get back. That's called the Guaranteed Minimum Pension or GMP. Most schemes pay out a lot more than this. It would be very unusual in my opinion, to express the GMP as one big number, for the reasons given above. It's normally expressed as an annual or monthly figure. The reason for splitting out the two figures - the GMP and the extra pension from the scheme - is that they typically grow at different rates each year (different ways of accounting for inflation).

So the most important number is neither of the two numbers you posted. It's how much pension you will get each year. There's probably an estimate in your annual statement, projected forward to your retirement date.

Hope some of this makes sense.

Judith2020

Hi everyone thanks for your replies sorry for my confusion re pension pot I have a private pension as well hence my confusion.  Copy of last statement attached showing the figures.  I understand it a bit more now but would appreciate any further guidance as it seems an awful lot of money - thanks!

unkle

For LTA purposes the calculation is 1:20. Transfer value is different and is the larger value in your instance.

Croeso69

Judith2020 said:

Hi everyone thanks for your replies sorry for my confusion re pension pot I have a private pension as well hence my confusion.  Copy of last statement attached showing the figures.  I understand it a bit more now but would appreciate any further guidance as it seems an awful lot of money - thanks!

As it is being compared to LTA it looks like your accrued pension is £98,585 / 20 = £4,929 approx.

The transfer value of £196,123.04 is just under 40 times this amount.

Not massively generous but not appallingly low.

Personally I would keep the pension.

hyubh

Judith2020 said:

Hi everyone thanks for your replies sorry for my confusion re pension pot I have a private pension as well hence my confusion.  Copy of last statement attached showing the figures.  I understand it a bit more now but would appreciate any further guidance as it seems an awful lot of money - thanks!

So the £98k figure is the notional value of the DB pension for Lifetime Allowance (LTA) purposes (the LTA acts to effectively reclaim some of the tax relief previously given for pension contributions when a very large pension is brought into payment). The LTA applies to DB and DC pensions equally, however since CETVs for DB pensions don't have have to be calculated in the same way, or even use the same assumptions, the LTA uses a simple, standardised factor for them instead... which as the difference between your LTA input and actual CETV indicates, is grossly unfair to wealthier individuals who haven't had the benefit of a DB pension and had to invest in a DC one instead ;-)

How does your DB pension increase once in payment? The level of inflation proofing makes a big difference to understanding how big the bare multiple of annual pension to CETV actually is. 

Marcon

Secret2ndAccount said:

Your pension does, invisibly, consist of two parts. Since you've paid in every month, the government sets a minimum standard for the amount you should get back. That's called the Guaranteed Minimum Pension or GMP. Most schemes pay out a lot more than this. It would be very unusual in my opinion, to express the GMP as one big number, for the reasons given above. It's normally expressed as an annual or monthly figure. The reason for splitting out the two figures - the GMP and the extra pension from the scheme - is that they typically grow at different rates each year (different ways of accounting for inflation).

The GMP has nothing to do with 'paying in every month' and everything to do with the member having been contracted out of the State Earnings Related Pension Scheme. Not all schemes were contracted out of SERPS, in which case no GMP would have been built up.

Further build up of GMPs ceased on 5 April 1997, so it is quite possible that OP has no GMP, depending on whether the scheme is contracted out and when she joined it.