A Large Pension Transfer Value Doesn’t Tell the Whole Story

Imagine being told, for example, that your old workplace pension could be transferred into a pot worth £150,000.

It’s a substantial amount of money. And if the adviser is also talking about greater flexibility, investment choice or access to a tax-free lump sum, the offer might sound attractive.

But what does that £150,000 actually represent?

And how does it compare with the retirement income and other benefits you would be giving up?

A Transfer Value Isn’t the Whole Story

A cash equivalent transfer value (CETV) is a calculated amount that can be transferred from a defined benefit pension into another pension arrangement.

It’s a meaningful figure, but it doesn’t tell you everything about the benefits you’re giving up.

A defined benefit pension typically promises an income in retirement, calculated according to the scheme’s rules. Depending on those rules, it may also provide increases to that income and benefits for a surviving spouse or dependant.

The transfer value represents those benefits in a different form. It doesn’t, on its own, tell you whether exchanging them for a pension pot was the right decision.

When the Transfer Figure Becomes the Selling Point

One problem we’ve encountered when reviewing defined benefit pension transfer advice is the way the transfer value was presented to clients.

In cases we’ve reviewed, some advisers placed considerable emphasis on the lump sum available to transfer, rather than properly explaining the value of the benefits being surrendered.

An adviser might describe a pension from a previous employer as frozen or locked away, creating the impression that the money wasn’t doing very much where it was.

The conversation could then turn to the substantial amount available to transfer into a personal pension or SIPP, with greater investment choice, flexibility and potentially access to tax-free cash.

Presented this way, transferring could sound like an opportunity to take control of money that was otherwise sitting untouched.

But a defined benefit pension isn’t simply an investment pot waiting to be accessed. It provides retirement benefits according to the scheme’s rules, regardless of whether the member is still working for the employer.

What mattered was whether the potential advantages had been properly weighed against the benefits the client would lose.

What Can Get Lost in That Conversation?

What concerns us about these cases isn’t necessarily the size of the transfer value. It’s whether the client understood what that figure represented.

Someone shown a transfer value of £150,000 might naturally focus on having that amount in a pension pot they could manage or draw from, subject to the relevant rules.

What may be less immediately obvious is the value of the income they would otherwise receive throughout retirement.

That income could continue for many years and, depending on the scheme, include increases and benefits for a surviving spouse or dependant.

The comparison isn’t straightforward. A transfer value is calculated using actuarial assumptions to place a current value on the pension benefits being surrendered. It isn’t a prediction of how much income someone will receive if they remain in the scheme, or a guarantee of what an alternative pension arrangement will provide.

In the cases our solicitors have discussed, the concern was that some clients were attracted by the immediate figure without fully appreciating the longer-term benefits they were exchanging.

That’s an important distinction. Understanding that £150,000 could be transferred is not necessarily the same as understanding the consequences of doing so.

What Should the Advice Have Explained?

The important question wasn’t simply how much money could be transferred. It was whether moving that money was suitable for the individual.

That required a meaningful comparison between what the original pension was expected to provide and what the proposed alternative could offer.

The advice also needed to consider the client’s circumstances, including their retirement objectives, financial position and ability to withstand investment losses.

There may be situations where someone has good reasons for preferring greater flexibility or control over their pension.

But those preferences needed to be considered alongside the security of the benefits being surrendered, rather than allowing the size of the transfer value to dominate the recommendation.

The client needed to understand not just what they might gain by transferring, but what they would no longer have.

Closing Insight

A large pension transfer value can make a lasting impression. But the figure itself is only one part of a much bigger decision.

In our experience, the problem sometimes lies in the gap between what the client was shown and what they understood.

Being told how much money could be transferred is one thing. Understanding what you are giving up in return is quite another.