Should I Accept My Enhanced Transfer Value or Not?
Are you currently considering whether or not to accept an Enhanced Transfer Value? Chances are that if you’re a deferred member of a Defined Benefit pension scheme, and are no longer an employee with that business, you qualify to take an entitlement in exchange for transferring out of the scheme.
But should you remain in the Defined Benefit scheme, or take the Enhanced Transfer Value? The answer will be different for everyone, depending on your own personal circumstances. In this blog, we will share all of the information you need in order to make an informed decision about your pension. Remember, you should always draw on the expertise of a qualified financial advisor so if you have any questions about your pension options, set up a free consultation with a member of the Elevate Financial Team now.
Defined Benefit Schemes: A Brief History
What is a Defined Benefit pension scheme?
Defined Benefit schemes were once incredibly popular pension options for employers. However, in recent decades, the number of DB schemes in Ireland has plummeted, with just 560 active private sector schemes in existence today – less than half of what there were in 2010. What made Defined Benefit schemes so attractive (and also a huge part of the reason why we don’t see them so much anymore) is that they promise members a consistent pension from retirement age to death. Their pension is calculated by the number of years they spent in service as well as an employee’s final salary. So if an employee spent 40 years working for their employer as a member of a Defined Benefit scheme, they would receive two-thirds of their salary at the time of retirement.
This type of promise hasn’t been sustainable for many businesses – life expectancy has risen, the economy has been rocky, and employees are far less likely to stay with one employer the same way they did in previous decades. As a result, most active DB schemes are closed to new members, while Enhanced Transfer Values have become an effective way for companies to reduce the number of existing DB members on their scheme, decreasing costs and liabilities in the process.
Understanding Enhanced Transfer Values
What is an Enhanced Transfer Value?
An Enhanced Transfer Value is an exercise where members of a Defined Benefit scheme are offered a once-off chance to transfer the value of their pension with enhanced terms to another scheme. The enhancement transfer value is typically based on a percentage value between 5-100% depending on the DB scheme and the company that is involved.
Here’s an example – if the original pension value for a member of a DB scheme is €180,000 and they are being offered a 20% Enhanced Transfer Value, it means that should they decide to accept, they have the opportunity to leave the DB scheme and transfer a value of €216,000 (€180k plus €36k) into a new scheme.
Again – the Enhanced Transfer Value offer will vary from one member to another, and the likelihood of a member accepting the ETV often greatly depends on how high of a percentage is offered to them.
Why am I being offered an Enhanced Transfer Value?
If you’ve ever been a member of a Defined Benefit scheme (these types of schemes have historically been particularly popular with banking institutions), you are likely being offered an Enhanced Transfer Value either because they are winding up the DB scheme entirely, or because they are working towards reducing the number of members in the scheme.
Before deciding whether or not to accept an Enhanced Transfer Value, you should weigh up all of the pros and cons involved in transferring to a new scheme.
Enhanced Transfer Value: The Cons
While staying in a Defined Benefit scheme as a deferred member might not even be an option for everyone (for example if a company is closing down), it’s important to know why it might make better sense to remain in the scheme as opposed to taking an Enhanced Transfer Value – should the option be available to you. So always check with the company in question to see if you have the option to stay.
While there are plenty of pros to accepting an Enhanced Transfer Value, it also means that you will no longer be able to expect all of the same benefits that you would with a Defined Benefit scheme.
Firstly, when you transfer out of a DB scheme, your pension income will no longer be a guaranteed or set amount. With a Defined Benefit scheme, your pension pot will fund you until death, regardless of how long you live. Other schemes won’t offer the same guarantee.
Once you’ve transferred out of a DB scheme, the decision can’t be changed – and it can often be the case that you won’t have a huge amount of time to decide whether or not to accept the Enhanced Transfer Value, so it’s important to be confident in whatever choice you make.
When you invest your pension fund in another scheme, like any other investment it can drop due to market volatility or economic instability.
Enhanced Transfer Value: The Pros
Now let’s look at the benefits of accepting an Enhanced Transfer Value.
By choosing to transfer your Enhanced Transfer Value into another scheme, you often have much more flexibility – particularly when it comes to what age your pension becomes available. For example, you may be able to access your pension by the age of 50 rather than 65, depending on the scheme.
You may also be eligible to take a tax-free lump sum from your pension pot. Defined Benefit schemes generally don’t carry many tax benefits, whereas other schemes enable members to withdraw 25% (or up to €200,000) tax-free, as well as a further €300,000 at the standard income tax rate (20%).
A Defined Benefit scheme typically pays 50% of the fund to a spouse if death occurs during retirement. However, it doesn’t pay out to dependents. With other pension schemes, family members often get more tax entitlements in the event of the death of the pension holder.
While market volatility means that there is no certainty around the value of your pension going up, you also have a far greater say as to how your pension fund is invested when you accept an Enhanced Transfer Value and transfer it to a new pension scheme. With a Defined Benefit scheme, the investment risks are completely different – you don’t have a say as to where funds are invested, and if for whatever reason an employer running a DB scheme goes bankrupt, you could lose 10% of your pension fund pre-pretirement.
I want to accept my Enhanced Transfer Value. How does it work?
So having weighed up all of your options, you’ve decided that you want to accept your Enhanced Transfer Value. Now what?
Firstly, you will need to formally accept your ETV from your former employer in the time frame that you’ve been given to make a decision. Next, you will need the help of a Qualified Financial Advisor who will be able to proceed with the transfer process with you. A Private Retirement Bond will be set up in your name, and your ETV will be transferred across. You can also transfer any other previous pension pots that you may have accumulated over the course of your career into the PRB. What a Private Retirement Bond does is keeps everything in one place. You decide how your fund is invested (taking the advice of a Financial Advisor into consideration, of course), and you can make changes to the bond should you need to as your personal circumstances evolve over time.
Some of the key benefits of a Private Retirement Bond are:
- A once-off, tax-free cash lump sum (typically up to 25% of the asset value) is available at the time of retirement
- You can transfer any remaining funds into an annuity or Approved Retirement Fund/Approved Minimum Retirement Fund, which would be in your name. An annuity gives you a regular income for the rest of your life
- You can access a PRB at the age of 50, and if you become seriously ill before that, you may be able to draw down your fund. If you die before you can access your PRB, the fund will be paid to your estate.
- A PRB is paid tax-free to your spouse in the event of your death.
- You have a wide array of investment options and can make changes over time
We hope that this article has provided the information that you need to make an informed decision as to whether to accept an Enhanced Transfer Value from a Defined Benefit scheme or not. As with all things pertaining to finances, everyone’s situation is unique. That’s why we strongly recommend talking to a member of the Elevate Financial team to discuss your own individual options, and help to steer you in the best direction to ultimately help you reach your retirement goals. We are impartial financial advisors, and we aren’t tied to any particular vendor or pension provider. You can be safe in the knowledge that we will always have our clients’ best interests in mind when recommending products.
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