If you are one of the many people considering an Enhanced Transfer Value, you are probably scurrying to assess potential options.
These Enhanced Transfer Values have been offered to many deferred members of Defined Benefit (DB) pension schemes. A deferred member is someone who is a former employee that still has a benefit entitlement and has not yet retired.
The aim of this blog is to provide you with some clarity around Enhanced Transfer Values, how the process works and why you have been offered it.
We will also cover the benefits and drawbacks associated with both staying in your Defined Benefit (DB) arrangement or transferring out.
However, we will also note that this blog will not substitute for financial advice. Whether it is contacting our team or someone else, enlist some help before making any decisions.
We have helped countless clients in similar situations and specialise in this field. Should you have any questions, we would be happy to answer them.
It is also worth noting that this blog is for those who have left the employment where they accrued their benefits.
A background to Defined Benefit (DB) pension schemes
Defined Benefit (DB) pension schemes have plummeted in popularity over the past 30 years.
This decline is down to various reasons such as; high administration costs, low interest rates and a change in accounting rules. Such changes have resulted in large liabilities for scheme administrators.
This means that many DB schemes have become a financial headache for employers. We also change careers now more than ever meaning the ‘job for life’ attitude has long passed.
Recent figures from the Pensions Authority state Defined Benefit schemes went from 2.500 in the early 90’s to under 500 in 2020. Many companies who currently run DB schemes have also closed to new members.
The use of Enhanced Transfer Values has also assisted companies in reducing their DB numbers and therefore costs and liabilities.
However, it is worth noting that DB schemes are not bulletproof either. They are a promise rather than a guarantee. The scheme assets must be sufficient to pay the benefits. However, the focus of this blog is on Enhanced Transfer Values rather than the history of Defined Benefit schemes.
What is an Enhanced Transfer Value?
An Enhanced Transfer Value is a once-off opportunity offered to former members of Defined Benefit (DB) pension schemes.
This Enhanced Transfer Value essentially means members will trade their Defined Benefit (DB) pension arrangements to transfer and accept a value.
We have explained this process in more detail below.
The percentage value of this enhancement will vary but it often ranges from 5-100% depending on the scheme and employer.
Above we can see an example of how an Enhanced Transfer Value calculation may work. The percentage of enhancement will differ case by case but above we have used 20%.
|Original Value||Enhancement Percentage (%)||Enhanced Transfer Value Offered|
In many cases, the percentage may be higher. Of course, the higher the level of enhancement offered, the more likely it is to be accepted.
Why is my previous employer offering me an Enhanced Transfer Value?
You may have been recently contacted by your former employer where your benefits accrued. Many companies across Ireland are currently offering Enhanced Transfer Values to deferred members.
If this is the case, you have some decisions to make. Whether that be to stay or go will depend on your personal circumstances. You should also consider factors such as:
- Will the scheme have sufficient funds to remain solvent should you stay?
- Would a tax-free sum be more suitable to your personal circumstances?
- What is the percentage of the ‘enhancement’ being offered?
These are just some of the questions to ask yourself. However, there is no one-size-fits-all when it comes to this and it is important to speak to a professional.
The reason your former employer is offering an Enhanced Transfer Value is that they are attempting to reduce the costs and liabilities associated with running a DB scheme.
Offering an Enhanced Transfer Value to deferred members gives them the opportunity to reduce future liabilities in an efficient manner.
Do not assume that your employer has all your personal information correct. Were you married during your service? Ensure these details have been updated.
How does accepting an Enhanced Transfer Value work?
Should you wish to accept an Enhanced Transfer value, you will transfer your benefits to a separate pension arrangement.
There are a couple of steps involved in the process of accepting an Enhanced Transfer Value. As a general rule you can expect a process similar to the below:
- Register your interest in an Enhanced Transfer Value after being contacted by your former employer.
- Receive your paperwork outlining what you are being offered.
- Make a decision on if you would like to proceed or not.
If you choose to accept an Enhanced Transfer Value and transfer, you will use an arrangement called a Personal Retirement Bond (PRB) .
A Personal Retirement Bond or PRB is a pension scheme set up to provide retirement benefits for a former member of an occupational scheme. It will be set up in your name and you will have full control over investment decisions.
During the process of transferring benefits to a PRB, it is worth noting that a potential lump sum is based on salary plus service. This calculation will be carried out by an actuary and will depend on several variables.
After transferring your funds to a Personal Retirement Bond you will have a couple of options available.
- It will also enable you to access a 25% tax-free lump sum.
- The remaining 75% can be used to purchase an Annuity or invested into an Approved Retirement Fund (ARF)
An Annuity provides you with the option of a regular income for the rest of your life, no matter how long you live.
An Approved Retirement Fund (ARF) will allow you to invest your pension after you have taken your retirement lump sum.
The access to a pension tax-free lump sum along with flexibility of investment options is a major factor to most when considering transferring out of their DB pension arrangement.
Benefits of accepting an Enhanced Transfer Value
There are several benefits associated with accepting an Enhanced Transfer Value. Some include:
- Potentially access 25% of your benefits tax-free.
- You may be eligible to access your benefits from age 50.
- Transferring your benefits to a policy in your own name will give you control over investment decisions.
- It may be possible to access a higher tax-free lump sum.
- Benefits may be easier to inherit.
- Accepting an Enhanced Transfer Value may be suitable due to health, financial or other circumstances.
We have written another blog regarding deferred members and the benefits of transferring if you would like a more detailed answer.
At this point it is worth noting that although the above are benefits, the decision on whether to transfer or not will very much depend on personal circumstances.
Speak to someone experienced in this process and assess all options.
Drawbacks of accepting an Enhanced Transfer Value
As with anything in life, there are also drawbacks to accepting an Enhanced Transfer Value.
Although they are more to do with the benefits of staying in the scheme as opposed to a drawback of transferring out.
Some of the drawbacks of transferring out of your DB arrangement include:
- Your income is no longer a guaranteed amount.
- After investing your remaining funds, they are at the risk of the market and may drop.
- The decision to transfer out cannot be reversed.
- Often you have a short timeframe to make your decision.
As we see above, there are pros and cons to each decision. Take time, and decide on what suits your personal situation best.
Each option carries risk although if you are receiving an Enhanced Transfer Value this does reduce the risk somewhat.
If you have taken redundancy at any point in time, this may affect your eligibility to access a tax-free lump sum.
Are there other factors to be considered?
The main consideration is whether what you are being offered is ‘good’ value. Now this is a subjective term and may mean different things to different people.
However, the enhancement should be significant in order to tempt you out of your DB arrangement.
Although the solvency of your DB scheme is also a major consideration. There will not be much point staying in a scheme that will be unable to pay your benefits.
Here are some general considerations to think about regarding your Enhanced Transfer Value offer:
- Is the offer sufficient when compared to the value of the DB pension?
- How solvent is the DB scheme likely to be in the future?
- Are you comfortable with taking control of the investment choices surrounding your benefits?
- Transferring may allow you to consolidate your pensions should you have other arrangements.
Overall, it will depend on the level of enhancement you are being offered combined with your personal circumstances.
After assessing both of these you will have a clear understanding and a better idea of which path you would like to take.
Over To You..
In 2021 alone we helped numerous clients through the Enhanced Transfer Value process. Many of whom worked for some of Ireland’s largest companies.
We have experience not only with the process but also with all the major pension schemes and administrators.
We hope this blog has helped you understand your situation and what options you may have available to you.
As more and more people travel down the Enhanced Transfer Value route, it is important to enlist the help of those experienced in the field.
If you would like to organise a casual chat to assess your options, we offer a complimentary consultation.
This will give you an opportunity to ask any questions you have without being under any obligation to proceed. If you would like us to assist further then that can also be arranged.
Thanks for reading and feel free to contact us on the below with any questions.
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*This blog should be used for information only and not taken as financial advice.