Guide to the Defined Benefits Pension Transfer Calculator

What is my defined benefits pension transfer value likely to be worth?

What you need to enter

The first calculation is to give you an estimate of the transfer value range you might be offered based on your deferred pension. A deferred pension is one you are entitled to at retirement, or from a previous employer. But it must be before you have either taken the cash sum, or started the pension. If you are already receiving a defined benefits pension you can’t get a transfer value.

The transfer value will depend on your age, the level of forecast pension when you retire, your retirement date and how generous the annual increases are on your pension both in deferment and when it gets paid. The range calculated is for illustration purposes only and does not constitute advice.

  1. The calculator requires that your future pension value is expressed in today’s money terms. Scheme statements will generally tell you the value of your pension on the date you left the company, which could have been many years ago. In deferment, your pension is annually ‘revalued’ by a certain percentage to help it keep pace with inflation. Sometimes, the rate by which your pension is revalued each year is recorded on the statement. If not, an estimated revaluation rate of 3% a year will give you a good idea of the likely value in today’s money terms. Sometimes, a scheme statement only provides a projection of what your pension will be at retirement age which, again, could be many years away. To work out the value in today’s money terms, discounting the projected value by 2.5% a year from the scheme’s normal retirement date to today’s date will provide a decent estimate of the value in today’s money terms.
  2. You then need to say whether your pension is payable at age 60 or 65. If it is payable at a different age, take the age that’s closest.

What it tells you

The first output is a guide to the potential Defined Benefits transfer value range. This transfer value must in the first instance go in to an HMRC registered pension scheme, Once transferred, you will be able to take advantage of the new pension rules to avoid an annuity purchase and leave pension values for the next generation.

Transfer values are individually calculated by your scheme’s actuaries and values will vary from person to person and scheme to scheme, so we have given a range within which most transfer values should fall. As a guide to where you might be in the range:

  • The nearer you are to retirement the higher up the range you should be
  • The more generous the annual increases to your pension in deferment and in payment and the larger the widow/er’s benefit, the higher up the range you should be
  • If you are in a funded state-backed scheme, your transfer value will likely be lower down the range
  • If your scheme has a large deficit, your transfer value could be significantly lower
  • If you are in an unfunded state scheme, you will not be offered a transfer value.

If you know your exact transfer value you can add this into the relevant field in the calculator; otherwise the estimated value will be used in the calculation.

If I transfer my pension out of my defined benefit scheme, what might my fund be worth to my children or grandchildren?

What the calculator shows

The projections show both the income you could receive and the residual pension fund values that would likely be available to pass onto beneficiaries. These are based on specific ages for handing over the pension and assumed rates of return. This is for illustration purposes only.

The investment return projections are net of inflation so the values shown are in today’s money terms. Most projections you will see from insurance companies and in Transfer Value Analysis System (TVAS) reports are nominal return projections without taking account of inflation. These can produce nice big numbers but, in reality, do not give a good impression of real values. The return rates also make an allowance for fees of 1.5% p.a. for pension administration, advice and investment management.

The calculator takes the middle of the range estimate and projects this forward, with the option of a matched pension (providing the same level of income as the defined benefits scheme) or a pension 75% lower than that offered by the defined benefits scheme, and with the opportunity to delay drawing an income for five years. The ages that you can select for death/ceasing to draw from the pension are 80, 85 and 90. If you have a spouse or civil partner, it’s worth remembering that a defined benefits pension provides a widow/er’s pension after your death, if earlier. To take account of this, the age selected (80, 85 or 90) should be based on the last death, but using your/the member’s age.

There is effectively a 100% widow/er's benefit assumed in the calculation, with no reduction on the first death. It's worth noting that under new rules you will be able to stop drawing a pension when it suits you, so even though one of you may still be around for longer it may be that they won’t need the pension any longer.

If your calculation outputs suggest that the pension fund will be exhausted before your chosen age, the residual value will show zero and the income paid will show you how many years your selected pension could be paid before the fund runs out.

The calculation looks at the pension benefit only and ignores the tax-free cash sum. Most defined benefits schemes and personal pensions created from transfers will allow a tax-free cash sum to be withdrawn. In a defined benefits scheme, it has to be taken all in one go and the scheme pension must start at the same time. For a transfer, the tax-free cash sum can be drawn in chunks over time and the pension can be deferred and started independently of taking some, or all, tax-free cash available to you.

Pensions can only be transferred to the next generation on death, but from April 2015 can be transferred free of the death tax and free of inheritance tax. Those who inherit the pension will pay income tax at their own rates on withdrawals, which can be made at their discretion.

In a defined benefits pension scheme, the cash and pension payments are fixed and guaranteed by your scheme and previous employer. Both defined pension benefits and transfers are relatively complex and you should always take advice about your options as you approach retirement. A transfer out of a defined benefits scheme is irreversible and can only be done after advice has been given by a qualified adviser.

Investment return assumptions

The calculator allows you to select a range of investment returns from -2% p.a. to +2% p.a., which are explained and put into context in the table below.

Real rate used

Equivalent Gross Return At Current Inflation of 2.5% p.a. and Fees of 1.5% p.a.

How Could you Earn this Return?

-2% p.a.

2% p.a.

Fixed term deposit accounts or Gilts

-1% p.a.

3% p.a.

Very low risk corporate bonds

0% p.a.

4% p.a.

Average risk corporate bonds

1% p.a.

5% p.a.

Higher yield corporate bonds or a bond equity mix

2% p.a.

6% p.a.

Higher yield corporate bonds or a bond equity mix

 

The calculator’s highest return rate is 1% lower than the highest range projection currently permitted by the Financial Conduct Authority (FCA), which is 7% p.a. Most people will want to invest their transfer value relatively cautiously and a 1% p.a. to 2% p.a. range is a good guide. Generating less than inflation after fees is unlikely to produce a better outcome than staying in the scheme.

Important information

The investment return rates would not be guaranteed and the cash sums and pension income you will be able to draw, and any residual value you will be able to pass on, from a transferred pension will depend on how much investment return your fund actually makes.

In a defined benefits scheme, the cash and pension payments are fixed and guaranteed by your scheme and previous employer. Both defined benefits pension benefits and transfers are relatively complex and you should always take advice about your options as you approach retirement. A transfer out of a defined benefits scheme is irreversible and can only be done after advice has been given by a qualified adviser.

  • If you are a member of a pension scheme with safeguarded benefits, it is likely it would be in your best interests to retain the safeguarded benefits.
  • Make sure you understand all the risks before investing.
  • The value of investments and the income they produce can fall as well as rise and you may not get back your original investment. Once you transfer, you will become responsible for the management of your investments.
  • Any information contained within this website should not be deemed to constitute investment advice and should not be relied upon as the basis for a decision to enter into a transaction, or as the basis for any financial or investment decision. Investors should always seek professional advice in regard to the suitability of any investment.

Tideway Investment Group comprises the following entities: Tideway Investment Partners LLP; Tideway Wealth Management Limited and Tideway Asset Management Limited. Tideway Asset Management Limited and Tideway Wealth Management Limited are appointed representatives of Tideway Investment Partners LLP, which is authorised and regulated by the Financial Conduct Authority. FCA number: 496214.

Tideway Investment Partners LLP
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London EC3A 4AF
+44 (0)20 3143 6100
info@tidewayinvestment.co.uk

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