Transfer Values for Defined Benefit Pensions

numbersrule

I have a DB Pension from a former Employer which I haven't started to take yet.  I requested a Transfer Value recently because I wanted to check and see if I would be better off with an Annuity as rates seem to have risen more than my benefits are growing.  However, I was somewhat dismayed to find that the Transfer Value quoted is less than 65% of an earlier Transfer Value I obtained 2 years ago.  Have Transfer Values really fallen that much over the last 2 years?  It's not a large amount, as I only worked there for 3.5 years in the 1990's but it will nevertheless form a component of my pension provision and I currently intend to retire in 2030 at age 67.

JoeCrystal

Yes, makes perfect sense when you consider that "cost" is a lot cheaper due to the rise in yields. How large is the CETV, and what was your expected pension based on today's term and if it is index-linked or not? It is possible that you may not have any index-linked income at all, considering you mention services which may predate 1997.

numbersrule

JoeCrystal said:

Yes, makes perfect sense when you consider that "cost" is a lot cheaper due to the rise in yields. How large is the CETV, and what was your expected pension based on today's term and if it is index-linked or not? It is possible that you may not have any index-linked income at all, considering you mention services which may predate 1997.

Hi JoeCrystal
Thanks for replying as it sounds like you know a thing or two.
I see what you mean.  The current DB illustration for Annual Pension is 5% of current Transfer Value.  I am 62.  The DB includes a CPI Index Link. I suppose 5% is not far out in terms of an equivalent Annuity Rate.
If you don't mind, can I ask what CETV stands for?

Marcon

Cash Equivalent Transfer Value.

JoeCrystal

Stand for Cash Equivalent Transfer Value. In theory, it is the cash equivalent value of the benefits you would receive from your defined benefit pension. However, it can vary massively as each scheme will have its way of calculating what it is "worth". The LGPS, for example, would have very low CETV.

artyboy

The CETV is irrelevant in the sense that whether it was £50k or £100k, you will still get the same pension payout entitlement from the scheme.

There is of course the argument that if you had somehow managed to transfer out when CETVs were at their peak, and then sat on that value without risking it, you might have at this point in time have got a higher annuity value.

But that is no different to timing the market with DC pension investments. Or, to put it another way... gambling.

 

Albermarle

A CETV is the amount a pension scheme will pay you to get you off their books, and remove their liability of having to pay you a CPI linked guaranteed pension for potentially the next 30 years ( or more).
As it is usually a bad idea to take the CETV and give up the pension, the financial authorities have made it pretty difficult and expensive to do so .

HappyHarry

numbersrule said:

I have a DB Pension from a former Employer which I haven't started to take yet.  I requested a Transfer Value recently because I wanted to check and see if I would be better off with an Annuity as rates seem to have risen more than my benefits are growing.  However, I was somewhat dismayed to find that the Transfer Value quoted is less than 65% of an earlier Transfer Value I obtained 2 years ago.  Have Transfer Values really fallen that much over the last 2 years?  It's not a large amount, as I only worked there for 3.5 years in the 1990's but it will nevertheless form a component of my pension provision and I currently intend to retire in 2030 at age 67.

There is a significant correlation between CETVs and annuity prices. 

This is due to them both being linked to prices of gilts. Generally, as interest rates rise, the yield on gilts rises and their capital value falls. This means that annuity rates rise as buying the same future guaranteed income now becomes cheaper. 

But because buying a future guaranteed income is cheaper, the cost of providing a DB pension for life is also less expensive for the DB trustees, and so their offer of a CETV is lower.

As an aside, I have never seen a CETV large enough to purchase an annuity on a similar basis to that which the DB scheme offers.

Stubod

Before I retired I was looking at my CETV on an regular, (annual) basis. However the year before I was actually due to retired (about 5 years ago), I checked the latest CETV's and they had all tanked. I had 4 seperate DB pensions and in the last year of checking they all dropped by about 30/40%, so I just started taking the pensions instead.

Cobbler_tone

Just an example of a CETV I have in writing:
2019: £678,542
2021: £453,227

The pension is still worth the same.

daveyjp

If the interest rate is 1% you need a higher lump sum to generate a guaranteed income of say £10k, than when the rate is 5%.

At 1% interest you need a lump sum of £1,000,000, at 5% you need £200,000.  The lump sum figure is the CETV.

Outcome is still £10k a year.