If you have been offered an enhanced transfer value against your defined benefit pension plan, then this article will help you immensely.
An enhanced transfer value is generally given as an incentive to switch to a different pension plan, and we’ll discuss whether or not that’s advisable. But before we get into whether or not you should opt for one, it is important to understand what qualifies as an excellent enhanced transfer value offer and how to calculate it.
Let us understand what a good enhanced value transfer offer is
If you have been investing in your defined benefit pension plan and are nearing your retirement age, then it’s very likely that you’ve received an enhanced transfer value offer.
How this offer is calculated is by offering you a multiple of the total value of the money you’d get at the age of retirement.
So, for instance, if your corpus at the age of retirement is £10,000 and your enhanced transfer value is £200,000 then the multiple is 20x. The higher this multiple, the better your offer value is.
– Immediate access to liquid funds
Unlike your defined benefit pension plan, which would kick in after your retirement, an enhanced value transfer is made available almost as soon as you sign the transfer.
So if you can gauge some short-term expenditure that cannot be covered any other way, then it’s a good idea to take the deal. Another reason to take the deal will be if you have a second pension plan, like a personal retirement saving account.
Since you have a second pension kicking in post-retirement, your financial needs would be fulfilled without you having to rely on the corpus of this scheme.
– How close to retirement are you?
It would be best if you consider this question because the closer you are to retiring, the better would be the terms of your enhanced value transfer.
So if you have less than ten years of service remaining, it would be advisable to consider taking this offer. Having said that, before you make any such decision, it is always best to consult a financial advisor who knows more about defined benefit pension plans.
The reason is that most defined benefit contracts are lengthy and complicated to understand, even for most financial advisors. However, if given enough time, they’d be able to assess the true value of your deal and give you a more conclusive answer than you could find yourself.
To be able to know your total offer much better, understand how enhanced transfer value is calculated.
– Inheritance tax benefits
Another feature of defined benefit pension plans is that they can be transferred to your next of kin in the event of your demise, giving them the financial security you’d want them to have in your absence.
There is a slight catch to this. If you were to die after the age of 75, 55% of your corpus would be taxable, meaning that your beneficiary would get only 45% of the remaining amount.
So, if your health parameters are perfect, you’d instead withdraw this money without incurring any taxes and leaving behind whatever amount you save from it. That way, the entirety of that amount would pass along.
– Invest once and benefit twice
With an enhanced transfer value offer, not only do you get a chunk of your retirement corpus before you’ve even retired, but you’re also now eligible to get your pension from a different corpus.
Yes, you understood that correctly; instead of paying money to invest in a retirement plan, you’d be offered money to do so.
Most people who choose to go ahead with this offer understand the terms of the new scheme, compare it with the old one and add the amount of money being offered currently to understand if it would genuinely benefit them to switch and take this deal or not.
After reading through the entire article, you understand the basic parameters that need to be taken into account before you can decide one way or the other.
The second thing you ought to remember is that no matter how convinced you are, it is always better to get a second opinion from a professional who understands the market much better.