Are you a Defined Benefit Pension Scheme member? Have you been offered an Enhanced Transfer Value (ETV)?
Do you hold a benefit in a Defined Benefit pension scheme with a previous employer?
If so, you may have been offered an enhanced transfer value (ETV).
However, if you have been offered this, should you take it?
What’s best for you?
Not what’s best for your former employer or an insurance company.
What is the best option for you?
It’s different for everyone and really depends on your personal circumstances.
Hopefully, this article will give you some information that will help you if you currently face this choice.
What is a defined benefit pension?
Firstly, back to basics.
What exactly is a defined benefit pension?
Typically seen as ‘good pensions’.
An employee works X number of years and in return receives a fixed pension at retirement age based on their service and final salary.
Guaranteed for life, into your bank every month.
Sounds great, that is because it usually was.
However, the cost of these pensions was borne by the employer.
Now, numerous factors have contributed to the cost of these pensions becoming unsustainable for employers.
Life expectancy is higher meaning a longer time to pay the pension.
Furthermore, in a fluctuating economy, it’s a guaranteed commitment to keep funding the pension.
Also, the days of employees remaining with one employer for 40 years are all but gone.
To keep it simple, think Defined Benefit, think fixed pension payable for life.
Differing from a defined benefit, we have a defined contribution which you can read more about here.
What is an enhanced transfer value (ETV)?
Let us look at what an enhanced transfer value is.
A deferred member of a scheme can give up their right to their fixed pension in return for a Transfer Value.
In this case, the transfer value moves into a defined contribution structure.
An ETV is essentially an uplift on the standard transfer value on offer.
The enhancement is usually a % of the transfer value, I’ve seen them range up to as high as 110% or 120%.
Example
For example, a deferred member has a standard transfer value of €100,000 to remove themselves from the defined benefit scheme.
In this case, we will give them an enhancement of 50%.
This means they receive an ETV of €150,000 (€100,000 plus 50% of €100,000).
Importantly, the ETV on offer varies from scheme to scheme and member to member.
Why are Enhanced Transfer Values offered from defined benefit pensions?
Simply put, the less number of members in the scheme, the less financial liability.
In other words, fewer costs.
The ETV is typically provided in two circumstances.
1) The defined benefit scheme is trying to reduce the numbers in the scheme (reduce costs) or
2) The scheme is actually winding up (closing down)
Pros and Cons
Unquestionably, there are pros and cons to either accepting the ETV or declining the ETV.
Cons
Firstly, you won’t receive the same benefits as the defined benefit pension.
Your defined benefit pension will be gone, replaced by a defined contribution fund.
No more guaranteed pension
Undoubtedly, your defined contribution will give you pension benefits, but significantly different benefits from the defined benefit pension.
Furthermore, maybe not to the level of the defined benefit pension.
Investment risk, once you accept the transfer, you carry the investment risk.
Indeed, once you accept the ETV, you cannot change your mind.
Nonetheless, if the scheme is winding up, you will not have the option to decline.
Pros
Alternatively, what are the pros?
Flexibility, you have greater flexibility.
Flexibility as to how you draw your pension benefits.
In addition, when you draw your pension benefits.
If you accept the transfer, you can access your benefits once you are age 50 or over.
You will have access to a tax-free lump sum, typically 25% of the fund value.
Should you pass away prior to drawing your pension, your value will pay to your estate as a lump sum.
Tax-free to your spouse if you are married.
Ultimately, you have greater control over how you draw your pension and when you draw it.
Where does the transfer go?
If you accept to take the transfer, this will likely go into a Personal Retirement Bond (PRB).
A PRB is simply an individual, defined contribution pension owned by you.
What are the main benefits of a PRB:
- Accessible from age 50
- A tax-free cash lump sum, usually 25% of the fund value
- The option to invest the balance in an Approved Retirement Fund (ARF) once you take your tax free cash
- Alternatively, if you do not wish to invest in an ARF, you can purchase an annuity (a fixed pension income payable for life)
- Should you pass away before drawing the pension, the value of the PRB is paid to your estate
- Control over the investment
Summary
So, should you accept your enhanced transfer value or not?
It really is down to the individual’s personal circumstances.
Some it will suit, others it won’t.
Everyone’s situation is unique.
This is why, if you are provided with an ETV, pay no attention to what a former co-worker is doing.
What you should do, and what is really important, is seek individual financial advice.
Not advice from the scheme administrator or from the pension company working on the ETV project, get independent advice.
It’s a major financial decision, you should pay a fee to get proper advice.
Proper advice will map out both scenarios to you.
Putting you in a position where you can make an informed decision on whether to accept or not.
How we help
We can provide that independent, objective counsel you need.
We will talk you through the enhanced transfer value.
Firstly, making sure you understand it.
Secondly, we would map out your financial future.
Showing your future both based on taking it and based on not taking it.
This would allow you to make the best decision to meet your future goals.
Get in touch
If you would like to discuss this service, email us at info@fortitudefp.ie or request a callback.
Alternatively, you can get us on 086 0080 756 or access our diary here and book a call at your convenience.
Why not visit our insights.
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You should always engage the services of a fully qualified financial planner before entering any financial contract.
To discuss engaging the services of Fortitude Financial Planning please email us at info@fortitudefp.ie.
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