Enhanced Transfer Values (ETV) from Defined Benefit Schemes
From time to time Defined Benefit pension schemes will offer members an Enhanced Transfer Value should they elect to leave the scheme.
An Enhanced Transfer Value is simply a monetary amount in excess of the valuation of your existing pension benefits. Accepting an Enhanced Transfer Value can be extremely attractive however, in doing so you are making a decision to forgo valuable future benefits under your existing pension. Your decision to leave is irreversible, hence particularly detailed consideration is advisable.
What is an Enhanced Transfer Value?
Enhanced Transfer Value's take the capitalised value of your pension benefits, what it is worth in cash terms, and enhances this amount by adding an additional cash value. This is the Enhanced Transfer Value you are being offered. Generally the value you will be offered is a multiple of the income you would otherwise receive. Whilst there is no set multiple to use in this regard, a value may be somewhere in the region of 20 times income.
Pros and Cons of accepting an Enhanced Transfer Value
There are pros and cons to accepting an enhanced transfer value.
*A Defined Benefit pension may provide an ongoing income to a spouse or for a set period of time
**A Defined Contribution pension can generally avail of post retirement options which can be inherited
The difference between Defined Benefit pension and Defined Contribution pensions
Defined Benefit pensions offer a guaranteed income in retirement. Typically this type of pension scheme is no longer available in the private sector. The value of your benefits is linked to your salary and service; historically a Defined Benefit pension scheme would have aimed to provide an income in retirement of 2/3 of the final salary after a career working in a particular employment.
Defined Contribution pensions are based on an underlying monetary value, this being the accumulated value of the scheme's assets. In turn this value is drawn upon to provide an income in retirement.
The value of your Defined Benefit Pension
This will be presented in the documentation you will receive on being offered an Enhanced Transfer Value.
What happens when you accept an Enhanced Transfer Value?
The cash value you are being offered will be transferred to a Defined Contribution pension of your choosing. You will find more information on the types of schemes you can transfer to below. You entitlements under your existing Defined Benefit scheme will cease. You will be unable to reverse this decision.
In accepting the Enhanced Transfer Value -
You are making an irreversible decision to forgo the guaranteed benefits offered by your Defined Benefit pension scheme.
In not accepting the Enhanced Transfer Value -
The Enhanced Transfer Value will be offered for a limited period of time. By not accepting you will not be able to claim the enhanced portion of the transfer value into the future. This may be a significant percentage increase in value.
By remaining in your Defined Benefit pension you are accepting the promise of your previous scheme to pay you in the future. In doing so you should understand that Defined Benefit schemes must stand up in their own right. There is no guarantee beyond the schemes own funding. You must understand if the scheme is adequately funded, if there is a deficit, what is the nature of the deficit and what is the plan to resolve it. There is also a hierarchy amongst members of Defined Benefit plans which determines who is paid first. Broadly this is a three tier system with those retired and receiving their pension having first priority followed by those not yet retired but still active members of the scheme. The lowest level of priority is given to those who are no longer active members of the scheme. Most likely if you are being offered an d Enhanced Transfer Value, you are a member of this cohort. For example, if the enhanced transfer value you are being offered relates to a previous employment, you are invariably a member of this third group.
Example (based on an actual case)
Man in his early 50's with Defined Benefit pension benefits from an employment he left over 15 years ago.
Enhanced Transfer Value offered - €162,000
Annual income being forgone - €7,800
'Expression of Interest' form - there is usually a final date beyond which you will no longer be eligible for the enhanced transfer value.
Meeting - you will generally be offered a meeting with the existing benefits consultant at which be presented with an offer, and some options, this will include the enhanced value. You are under no obligation to engage this consultant and are free to take independent advice.
Acceptance period - you will be given a period to consider the offer (usually 1-2 months).
Should you accept - a suitable receiving scheme is required. This may be a your current occupational pension scheme or a pension structure in your own name. Choosing the most appropriate receiving scheme will have a bearing on your future options and warrants serious consideration in its own right.
Ultimately there is no one right answer. For some individuals, leaving their existing Defined Benefit pension intact will be the most appropriate course of action. For others accepting the Enhanced Transfer Value will be more beneficial; within this group, how this is structured will be of critical importance.
At SMP Financial we have considerable experience in guiding clients in complex pension matters. If you would like to discuss your options further, please contact us through the form below.