CETV value and annual pension

muswellblue

hi, I was quoted £425000 CETV value about 3 years ago if I wanted to transfer out my whole final salary pension, it’s now dropped almost £200000 in that time. My forecasts if I didn’t take it out for 25% lump sum and annual pension income haven’t really changed. 

I don’t totally understand why the annual pension hasn’t changed but the CETV has gone down? 

Hoenir

If you were to take the CETV rather than the pension. Due to the rise in interest rates. It would cost you less to buy an annuity to provide the same level of pension income. There's no "investment pot" with a DB scheme. Just an entitlement to a guaranteed income. 

Yorkie1

Others who understand this far better than I do will be along in due course, I expect. But as a starter:

- your forecasts of the final salary lump sum / annual pension won't change much if you haven't changed your salary levels much. These are based on the rules of the scheme, which are set pretty firmly
- however, the CETV value is based on a wider range of factors, some of which are variable including (I think) annuity rates or similar. That'w why CETV values have dropped significantly over the last few years

dunstonh

hi, I was quoted £425000 CETV value about 3 years ago if I wanted to transfer out my whole final salary pension, it’s now dropped almost £200000 in that time. My forecasts if I didn’t take it out for 25% lump sum and annual pension income haven’t really changed. 
I don’t totally understand why the annual pension hasn’t changed but the CETV has gone down? 

Gilt yields is the reason.    Post credit crunch, gilt yields fell to record lows.     Gilt yields are used in the calculation for CETVs.    When gilt yields are low, CETVs rise.  When gilt yields rise, CETVs fall (ignoring all other things that can influence.

So, post credit crunch until November 2021, CETVs were higher than the long term average.   They are now back in the ballpark of where you expect them to be for their long term average.

. My forecasts if I didn’t take it out for 25% lump sum and annual pension income haven’t really changed. Defined benefit pensions do not have 25% Tax free cash.  They have pension commencement lump sum based on defined calculations on your time in service and pensionable salary.     There is no pot/value to apply 25% to.

The CETV only has relevance if you are looking to transfer from the DB pension to a DC pension.  If not, then you can totally disregard the CETV.

Marcon

dunstonh said:

. My forecasts if I didn’t take it out for 25% lump sum and annual pension income haven’t really changed. 

Defined benefit pensions do not have 25% Tax free cash.  They have pension commencement lump sum based on defined calculations on your time in service and pensionable salary.     There is no pot/value to apply 25% to.

Actually there is: the capital value of the DB pension. Scheme such as the NHS Pension Scheme offer a 25% lump sum based on capital value:

A Pension Commencement Lump Sum (PCLS) is the maximum tax free retirement lump sum you can receive under HMRC rules. It is the lower of:

• 25% of your available standard lifetime allowance (LTA); or

• 25% of the capital value of your NHS Pension benefits being paid.

  
  

  https://www.nhsbsa.nhs.uk/sites/default/files/2023-03/NHSPensions_RetirementGuide_%28V26%29_202303.pdf
  

Linton

The CETV can be seen as equivalent to the cost of providing you with your contractual pension. As the interest the pension companies receive has increased  greatly in the past 2 years the amount they need in reserves now to pay your future  pension is much lower and hence so is the CETV.