B ed al e Fi n an c i al Ser v i c es
PROVIDING FOR YOUR RETIREMENT
Pension Transfers
If you want to move the pension benefits that you have built up (accrued) in one job to another occupational
scheme, you will be offered a 'transfer value' to buy benefits in your new scheme. The amount of your transfer
value will simply be the value of your own personal fund if you are in a money purchase scheme.
If you are in a final salary scheme, the transfer value is calculated by the fund actuary to provide a lump sum
which, if invested now, would produce a pension at your retirement that would be equivalent to your 'preserved
pension' - the pension you would get at retirement, if you left your accrued benefits with your previous employer's
fund. It begins with the calculation of the ‘initial cash equivalent’ (ICE) which is the cost of the accrued benefits
and any discretionary benefits that can be included.
Although the sctuary does the calculations, since 2008 the trustees have responsibility for any assumptions that
are to be made – about the likelihood of discretionary benefits being taken up, levels of underfunding, etc. – so
that the final cash equivalent transfer value (CETV) can be calculated. In a wind-up situation the CETV will be a
member’s share of the assets.
If you have moved jobs to a higher salary or to a company with a better pension scheme, you may find that your
transfer value will not buy you an equivalent number of years service as you had in your previous scheme. You are
not actually losing any money in this situation, the main reason is that the receiving scheme has to allow for your
increases in salary upto retirement and therefore the increased pension that will have to be paid. Since 1 January
1991, if you left your accrued benefits with your previous employer your preserved pension will increase by the
rise in inflation, up to a maximum of 5%. If you left before 1.1.91 only your benefits earned since 1 January 1985
have to be revalued.
You could also put your transfer value into a personal pension plan or Section 32 buy out plan. The key
differences between these plans relate to the age at which you can retire and how the benefits equivalent to the
State Earnings Related Pension Scheme and State 2nd Pension (S2P) are dealt with. There are also differences in
the payments on death before retirement and the maximum pension that can be paid. (See separate
explanations.)
If you choose to transfer from a final salary occupational scheme to a personal pension or a Section 32 plan you
will be moving from a scheme that provides a defined benefit to a scheme which will provide benefits based on a
defined contribution. In an occupational final salary scheme you are 'earning' a pension that will relate to your
final salary before retirement, with a personal pension or Section 32 plan you are building up a fund of money but you do not know what it will buy as a pension when you retire.
Before you transfer out of a defined benefit scheme to a defined contribution scheme, you must receive a transfer
value analysis; this shows you the rate of return (critical yield) that is needed for your pension fund to grow enough
for it to provide you with similar benefits to those from the final salary scheme.
This means that your benefits will depend on the investment growth of your transfer val ue. The value of your
investment may go down as well as up and past performance is not necessarily a guide to future performance.
Therefore it is possible that the final fund value will not equal the full amount invested.
Once you have chosen one of these options and it has been put into effect, you cannot change your mind.
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B ed al e Fi n an c i al Ser v i c es
If you invest in a 'with profits' fund, bonuses, once added, are guaranteed and cannot be taken away provided that the policy runs for the full term. If cashed in early, the bonuses will be reduced and there will be
penalties. Future bonuses also cannot be guaranteed as they depend on the performance and policies of the
company.
Your fund will grow free of income and capital gains tax under current legislation. However, the 19 97 Budget
removed some of the tax benefits from UK and foreign equity based funds.
If you die before retirement the fund would be used to provide an income for your spouse and/or a lump sum
can be paid to your estate, if you are not married. If the plan is 'written in trust' the lump sum would be paid
to your beneficiaries outside your estate and would not therefore be liable for inheritance tax.
Pension funds are intended to provide you with a regular income when you retire. It is sometimes possible to
obtain the benefits before your selected retirement date; for example on the grounds of serious ill health.
Under current legislation it is possible to take part of your fund as a tax free lump sum, but there are limits to
this and it means that you will have a smaller fund available to buy a pension. The pension will be liable to
income tax at the rate applicable to your individual circumstances.
Together with your adviser you should keep your investments under review and, approximately 5 years before
your retirement, it may be appropriate transfer your funds into lower risk investments. At this stage it is also
important to check that you are not going to 'over fund' your pension, i.e. that you are not going to exceed the
Inland Revenue's regulations regarding maximum contributions. At retirement it may be possible to increase
your pension income by transferring your funds to other insurance companies and/or delaying the purchase of
an annuity.
Many occupational schemes are now closed to new members or are closing completely, some are offering
financial incentives to members to take their benefits out of the scheme (because it limits the scheme’s future
liabilities) by offering an enhanced transfer value to take to another scheme. This will always need careful
consideration.
Pension funds that cannot meet their liabilities can now apply to the Pension Protection Fund (PPF) which should
be able to offer members 90% of their accrued benefits at retirement and 100% of their pension if it is already
being paid.
Scheme do not have to accept transfers unless it is a stakeholder pension plan.
Bedale Financial Services is regulated by the FCA for pensions and investment business only.
This information is based on our understanding of current legislation and Inland Revenue practice. You should
not take any action based on this information without consulting your financial adviser.
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