Defined Benefit (DB) Transfer - What is a CETV?
People who choose to transfer their Defined Benefit scheme typically want to take advantage of the Pension Freedoms Act and have more flexibility with their pension savings. By transferring your benefits to a Defined Contribution scheme, you would have a pool of cash that you could invest as you see fit and/or take as a lump sum.
A ‘cash equivalent transfer value’ (CETV) is the lump sum the pension scheme will offer you in exchange for you giving up any future claims to your Defined Benefit pension benefits. To calculate it, the scheme provider will consider factors like inflation, investment and longevity forecasts, as well as other assumptions. You should speak to an adviser before requesting your CETV.
You can only request a CETV free of charge once every 12 months and they expire after a short period of time, so we would advise that you make a decision to seek advice before requesting one.
What is a Transfer Value Comparator (TVC)?
In simple terms, a Transfer Value Comparator will show, in graphical form, both the transfer which has been offered by the Defined Benefit scheme, and the estimated cost of replacing the client’s Defined Benefit income through an insured annuity.
A TVC example can be found below, based on an individual receiving a CETV of £120,000.
How does this compare with the amount they will need to buy the same income on the open market?
It would cost £140,000 to obtain a comparable level of guaranteed income on the open market.
A TVC is used to address behavioural biases. For some individuals, the appeal of a large CETV can be significant, and having the ability to access it with complete flexibility is very tempting. A TVC seeks to address this by effectively saying ‘you can have £120,000 in a flexible arrangement, but you are giving up £140,000 to get that’. It often prompts individuals to look at this in another form.