Looking To Calculate Your CETV? Here Is How You Can Do It!
Retirement planning is incomplete without considering pensions, which are a vital component of financial security during retirement. As an employee, you are entitled to receive pension income from your employer. However, it is critical to understand how your pension income is calculated, as it can significantly impact your retirement plans.
In this blog, we will delve into the intricacies of calculating Final Salary Pension, with a specific focus on the Cash Equivalent Transfer Value (CETV). Furthermore, we will shed light on the critical role of an Independent Financial Advisor (IFA) in helping you make informed decisions about your CETV calculation.
To gain a more comprehensive understanding of this subject, we recommend viewing our YouTube video below, where we explore the intricacies of calculating your CETV and the significance of seeking expert advice from an IFA while making retirement planning decisions.
What is CETV Pension?
A cash-equivalent transfer value (CETV) is an essential consideration when reviewing your retirement planning options, but it is only applicable if you have a Defined Benefit/Final Salary Pension Scheme. It represents the value of the assets and benefits that can be invested to meet your retirement goals if you decide to transfer out of your current pension scheme.
It’s essential to note that your CETV is not the same as the amount in your pension fund. It is the amount your pension scheme will offer you if you decide to transfer out, and it can be viewed as a means of taking your pension with you if you opt to leave.
You have the statutory right to request a free CETV from your UK Pension Scheme Provider once every 12 months. This provides an opportunity to evaluate the value of your pension scheme and determine whether it aligns with your retirement goals. If you request a second CETV within 12 months, you may be subject to a fee ranging between £200 and £250.
It’s important to carefully consider the potential benefits and drawbacks of transferring your pension scheme, particularly given the current economic climate. While transferring your CETV can provide greater flexibility and control over your retirement savings, it may also come with additional risks and fees.
How To Calculate CETV?
Calculating your cash equivalent transfer value (CETV) can be a complex process. As such, UK legislation provides two methods to calculate a CETV:
The first and most common one is based on the estimated cost of providing the benefits you are entitled to in the scheme (normally a guaranteed, escalating income for life);
And the second is where the trustees of the scheme want to pay CETVs which are above the minimum amount. This could be because they are underfunded and wish to get rid of liabilities within the scheme.
If you are considering transferring out of your defined benefit pension scheme, your CETV is the amount that your pension scheme will provide you. It is made up of three components:
- The first is your period of service, which is the number of years you have worked for the company. The length of your service determines the percentage of the total contribution you are entitled to.
- The second factor is your previous salary at the company. This is typically based on your full-time salary for the relevant period.
- The third factor is your scheme’s accrual rate, which is usually set at either 1/60th or 1/80th.
The accrual rate is calculated annually and can have a significant impact on how long you stay in the scheme.
It is important to note that your transfer value does not indicate the value of your pension. Rather, it shows the amount of money you will receive if you choose to transfer your pension to another scheme. The reason for this is that when you transfer out of your pension scheme, you will lose out on safeguarded benefits, such as a guaranteed, escalating income for life. As a result, it’s important to seek advice on this to ensure that transferring out is the correct step of action for your unique circumstances.
The team of Pension Specialists at Cameron James can help you by providing expert advice on your Final Salary pension scheme, so book your consultation today if you would like to discuss your situation and your options.
Here is an example of calculating CETVs. Let’s consider the case of Alexa, who is in a Defined Benefit pension scheme with a final salary of £33,000 per year. Alexa has worked in the scheme for 20 years with an accrual rate of 60. To calculate Alexa’s CETV, we can use the following formula:
£33,000 x 20 / 60 = £11,000 – which means that Alexa’s scheme would provide a yearly, guaranteed pension income of approximately £11,000 for the rest of her life.
How to Find Out Your Pension Scheme’s CETV Value?
While understanding the CETV can be complex, there are ways to get a quick snapshot of its value. One useful option is to visit your pension scheme provider’s online portal and fill out the relevant form. This will generally give you an online valuation that is close to the actual CETV calculation.
However, the online calculator is not a definitive answer and is quite general. It may not take into account specific factors unique to your scheme.
Another option is to request your CETV directly from your UK Pension Scheme and obtain an official confirmation. You have a statutory right to request your CETV once every 12 months, and if you decide to transfer out your DB pension scheme, you have three months to complete the advice process. If you do not proceed with the transfer, you can obtain a second CETV for a fee, as previously stated.
To fully understand the actual value of your defined benefit pension, it is advisable to speak with a qualified pension transfer specialist and request a transfer value comparison. This will allow you to see how much it would cost you to purchase a pension that is equivalent to the one you currently have.
Get the Best Out of Your CETV
At Cameron James, we’re committed to providing you with expert guidance on your Defined Benefit / Final Salary Pension. Our team of FCA-regulated, UK-qualified IFAs are ready to help you understand your CETV value and recommend the best course of action based on your unique risk profile, financial planning, and overall situation.
Whether you’re just getting started or need help making an important decision, we have the knowledge and expertise to help you navigate the complex world of pensions. So don’t hesitate to take the first step towards unlocking the full potential of your pension – book a free initial consultation with one of our experienced IFAs at Cameron James. Contact us today to schedule an appointment and plan a secure and comfortable retirement.