Posted on: 13th Jun 2017
Final Salary Pension Transfers are delivering higher value than every before. We look at one situation where a Barclay’s Bank Final Salary Transfer reaped huge rewards for our client.
Deferred Final Salary Transfer
I’ve been a fully qualified financial adviser for 21 years now. For approximately 19 of these years no financial advisor would touch a transfer away from a Deferred Final Salary Scheme.
Things have changed. In the last couple of years, we have seen dramatic increases Cash Equivalent Transfer Values (CETV’s).
The CETV is a one-off lump sum offered by the trustee’s in return for giving up a ‘promise of income’ that was secured at the time a member left a Final Salary (or Defined benefit (DB)) scheme.
This rise in value has had a profound effect as you can see from the following real case that I looked at in December 2016.
Barclays Bank Pension Transfer
The client I was dealing with was 48 years old and had a deferred DB scheme with Barclays Bank. He became a deferred member of the Barclays scheme in April 2016.
He had secured a ‘promise of income’ of £24,000.00 gpa which would be re-valued annually right up to NormalDate (NRD), risk free, by a limited price index (LPI). His NRD was 60 years old. Using an assumed revaluation rate of 2.25%pa his ‘promise of income’ would have grown to approx. £30,000.00 gpa payable from 60 years old.
In turn the £30,000 would offer annual increases in payment together with a 50% dependents income in the event of his death.
Make no mistake this is a very nice position to be in, but by no means unusual.
Many people are not aware that there has always been a CETV attaching on offer for giving up DB benefits and for most of my career in financial services the transfer value on offer in no way reflected the true value of the benefits being given up.
This has changed.
To look at this in black and white terms consider the following:
If a scheme offered you £100,000.00 to give up all the above benefits you would be mad to consider it! However, if they offered you £2,000,000.00 to give it up you’d be mad NOT to consider it.
And at some point, in the middle there is a level of transfer value where you start saying ‘how much?!
Back to the real case study. The client in question requested a CETV early 2016. It was £825,000.00 and for some reason he did nothing about it. We requested another transfer value from Barclays Bank in October 2016. It had gone up to £1,050,000.00 now that was a level where the client said ‘how much!?’
Now, you run something called a Transfer Value Analysis Report to assess the relative value of the CETV which produces an estimated growth rate required to produce afund big enough to buy the ‘promise of income’ given up at NRD. It came out at 5%pa (after charges). The lower the number the better in basic term’s.
I worked out that if we grew the CETV by 5%pa it would be worth £1,885,000.00 by the time he turned 60 years old.
Note: there are NO guarantees that ANY growth will be achieved and that RISK is very much part of any decision to take a transfer value.
What would you pick?
Forget. If the Postcode Lottery knocked on your door and told you, you’d won. Further you had a choice between:
A: £30,000.00 gpa increasing with the price of beans with a 50% continuing pension for a spouse should you die.
B: A fund of £1,885,000.00 a ¼ of which you can take as flexibly as you like TAX FREE and full flexibility to take further taxable income as you desire.
I ask you, which would you pick…
Now, option A happens to be RISK FREE and with Option B ALL therisk is on your own shoulder’s (Or more pertinently your IFA’s!).
Considering giving up all the benefits of a deferred DB scheme is a big decision. It should only be made in conjunction with an IFA who is specifically authorised to provide advice on Occupational Pension Scheme’s. That happens to be me!
How long can it last?
The current trend for large CETV’s will, at some point, revert to norm and they will reduce as Gilt yields rise and in turnrates rise. In short CETV’s can go down as well as up. Now is the time to at least ensure you’re in a fully informed position as to ALL your option’s as a deferred member of a DB scheme in order to assess your options. So act now.
If you’re in a similar position and didn’t realise any of the above was possible, please contact me via our website www.havenifa.co.uk or by phone 0161 495 9340.