TRANSFER VALUE ANALYSIS (TVAS) REPORT UNDERSTANDING THE

Transcription

1 UNDERSTANDING THE TRANSFER VALUE ANALYSIS (TVAS) REPORT This information is for UK financial adviser use only and should not be distributed to or relied upon by any other person.

2 Introduction INTRODUCTION UNDERSTANDING TVAS REPORTS IS NOT ALWAYS STRAIGHTFORWARD AND, FOR ADVISERS WHO ARE NOT FAMILIAR WITH THEM, IT IS NOT ALWAYS CLEAR WHICH SECTIONS OF THE REPORT IT IS ESSENTIAL TO GO THROUGH WITH MEMBERS. This guide aims to highlight key areas of the report and provide some understanding of the terminology to help you have a meaningful conversation with your member. This is not a full version of a TVAS report but rather an extract. 1

3 Introduction 2

4 The Capitalised Value of Your Benefits (transfer value) is the amount the trustees of the existing scheme will transfer to another pension scheme in exchange for someone giving up their existing final salary pension benefits. This is also commonly referred to as the Cash Equivalent Transfer Value (CETV). There are several factors that go into determining what the transfer value will be, including assumptions on the rate of growth of the scheme's investments, inflation rates, the types of benefits offered by the scheme and the scheme s liabilities. The transfer value reflects the current position of the member s benefits and could increase or decrease in the future. Analysis Report Introduction The purpose of this analysis is to provide information, regarding the possible transfer of your benefits provided by the ABC Limited Retirement Benefits Scheme scheme to an alternative pension arrangement. This analysis does not, on its own, show whether or not transferring your benefits is advisable, as that also depends on many other factors, such as your attitude to risk your personal circumstances and your objectives. It does, however, give an indication of the likelihood of being able to match or exceed the benefits provided by your existing scheme with a transfer to an alternative plan. We have been informed that the capitalised value of your benefits (transfer value) in the ABC Limited Retirement Benefits Scheme scheme is: 250, and is guaranteed until 01/07/2017. The report compares this with the benefits that can be purchased by transferring this value to: Scottish Widows Retirement Account This analysis shows the results as: 1. The estimated annual investment return needed, from the proposed plan, to provide an annuity and if specified annuity and Pension Commencement Lump Sum (PCLS), at the scheme retirement date (your 65th birthday) of equal value to the estimated benefits provided by the existing scheme. This return is known as the Critical Yield. 2. The estimated annual investment return needed, from the proposed plan, to provide an annuity and if specified annuity and PCLS, at the scheme retirement date (your 65th birthday) of equal value to the estimated starting benefits, with no increases in payment, spouse s pension or guarantee period, provided by the existing scheme. This return is known as the Hurdle Rate. 3. The estimated annual investment return needed, from the proposed plan, in order to provide benefits, at the scheme retirement date (your 65th birthday) of equal value to the estimated benefits provided if the PPF takes over the provision of benefits from the existing scheme. This return is also known as the Critical Yield. 4. The estimated income options available from the proposed alternative pension policy. 5. The value of the death benefits provided by the existing scheme and the proposed plan at the date of transfer and then at various intervals. This analysis needs to be read in conjunction with the illustrations provided by the recommended provider and any recommendations made by your adviser. The analysis has been based on your personal information and the details supplied by the Scheme. 3

5 PENSION COMMENCEMENT LUMP SUM (PCLS) Your client may be able to take part or all of their pension benefits as a tax-free cash lump sum (also known as a Pension Commencement Lump Sum PCLS). If your client is a member of a defined benefit pension scheme, the scheme s rules will determine how much they can receive as a PCLS. If they re a member of a defined contribution (DC) pension scheme, they will normally have the option to take up to 25% of the value of their pension pot as a PCLS. In certain circumstances, your client may be able to receive a PCLS in excess of 25% of the lifetime allowance if they ve applied to HMRC for either scheme specific lump sum protection or one of enhanced protection, fixed protection or primary protection in a year when the lifetime allowance has reduced. Different terms and conditions apply to each of these protections. Estimated Benefits at your Proposed Retirement Age 65 The pension benefits shown below have been calculated as at 01/04/2017, and are increased to your normal retirement date as detailed in the record of input data. Your benefits are increased to the date of this analysis by applying the historical revaluation factors. From the date of this analysis to your normal retirement date, the benefits are increased in line with the prescribed assumptions. On this basis your pension at age 65 is estimated to be: An Annual Pension of 14,106 or A Pension Commencement Lump Sum of 65,108 and a reduced Annual Pension of 9,766 The amount of Pension Commencement Lump Sum quoted may be that chosen by you or specified by the scheme and might be less than the HMRC Maximum. The Pension Commencement Lump Sum and reduced pension assume that the terms, under the existing scheme, for giving up pension for a Pension Commencement Lump Sum, remain unchanged. 4

6 THE INCOME OPTIONS COMPARISON This section compares annuity or flexi-access drawdown benefits with the projected benefits available from the existing scheme. This section firstly looks at the position assuming no PCLS is taken and secondly if PCLS is taken at the selected retirement age. The annuity and flexi-access drawdown figures in this section are based on the projected funds, at different growth rates from the selected pension plan, assuming the transfer goes ahead. The projected fund values are highlighted at the top of each column. The comparison initially illustrates how much annuity could be purchased with the projected funds. The basis of the annuity can be agreed to suit the member s circumstances. The following row then reviews the position if the member instead uses flexi-access drawdown providing the same level of income as the annuity above, and projects until what age this could be sustained. The third comparison in this set highlights the level of income that could be sustained to expire at a given age. The given age can either be an assumption based on ONS data or a selected age. The graph and table in this section project the level of income in the years following retirement for the existing scheme, annuity and flexi-access drawdown. Income Options Comparison at Retirement Age 65 - Full Pension The below table shows the income options that could be available if the transfer was to go ahead to the proposed pension plan. Estimated benefits from the existing scheme, calculated to be 14, per annum In Scottish Widows Retirement Account, your fund value at retirement could provide an income of: Growth Rate Low (2%) Mid (5%) High (8%) Fund 260, , , Annuity single life level income. 11, , , Age that drawdown fund will run out, assuming same income as an annuity is taken. Drawdown amount available to maintain a level income to age 85* 13, , , The below graph shows the projected pension benefits for the existing scheme with the income options that could be available if the transfer was to go ahead to the proposed pension plan. The incomes in the graph include a State Pension of 12, starting at age 67 and increasing by RPI. The existing scheme pension and annuity from the proposed plan would provide a guaranteed income for life. The drawdown income from the proposed plan is not guaranteed and will be dependent on future investment returns. Age Existing Scheme Annuity Drawdown 65 14, , , , , , , , , , , , , , , , , , *Target age calculated using ONS National Life Tables, Great Britain ( ) 5

7 Income Options Comparison at Retirement Age 65 - Reduced Pension and Pension Commencement Lump Sum The below table shows the income options with Pension Commencement Lump Sum (PCLS) that could be available if the transfer was to go ahead to the proposed pension plan. Estimated benefits from the existing scheme, calculated to be 9, per annum and PCLS of 65, In Scottish Widows Retirement Account, your fund value at retirement could provide a reduced income and PCLS of: Growth Rate Low (2%) Mid (5%) High (8%) Fund 195, , , PCLS 65, , , Annuity single life level income. 8, , , Age that drawdown fund will run out, assuming same income as an annuity is taken. Drawdown amount available to maintain a level income to age 85* 9, , , The below graph shows the projected pension benefits for the existing scheme with the income and PCLS options that could be available if the transfer was to go ahead to the proposed pension plan. The existing scheme pension and annuity from the proposed plan would provide a guaranteed income for life. The drawdown income from the proposed plan is not guaranteed and will be dependent on future investment returns. *Target age calculated using ONS National Life Tables, Great Britain ( ) 6

8 The Critical Yield is the growth rate that would be required to match the benefits due from the DB scheme at the normal scheme retirement age if the transfer value is applied to the alternative personal pension. The Critical Yield needs to be considered alongside the member s attitude to risk as well as any other relevant circumstances and benefits. The Hurdle Rate is the growth rate that s required every year to match the starting pension in the existing scheme. This assumes there are no increases in the pension, no partner's pension and that the pension doesn t have a guaranteed period. Drawdown Income this section of the report shows the age at which the fund will run out if the member transfers their benefits and chooses to take them using drawdown. This is based on certain assumptions which include the pension being taken at the same age as the transferring scheme, the pension income being at the same initial level and increasing in line with RPI. Analysis Results at your Proposed Retirement Age 65 Annuity Purchase Critical Yield From the proposed plan you would need to obtain an estimated annual investment return as shown below, in order to purchase an annuity to provide benefits of equal value to the estimated benefits provided by the existing scheme at retirement. This return is known as the Critical Yield. All benefits taken as Pension Reduced Pension plus PCLS Scottish Widows Retirement Account 8.53% 7.07% Fund Required to Purchase the Annuity In order to purchase an annuity to provide benefits of equal value to the estimated benefits provided by the existing scheme at retirement the estimated Fund Required, also known as the Capital Value is as follows: All benefits taken as Pension Reduced Pension plus PCLS Fund Required 538, , Hurdle Rate From the proposed plan you would need to obtain an estimated annual investment return as shown below, in order to purchase an annuity to provide benefits of equal value to the estimated benefits provided by the existing scheme assuming no spouse s pension, no increases in payment and no guarantee. This return is known as the Hurdle Rate. All benefits taken as Pension Reduced Pension plus PCLS Scottish Widows Retirement Account 3.47% 2.58% Fund Required to Purchase the Annuity In order to purchase an annuity to provide benefits of equal value to the estimated benefits provided by the existing scheme, assuming no spouse s pension, no increases in payment and no guarantee at retirement the estimated Fund Required, also known as the Capital Value is as follows: All benefits taken as Pension Reduced Pension plus PCLS Fund Required 308, , Drawdown Income Assuming an income of equal value to the estimated benefits provided by the existing scheme, increasing by RPI per annum is taken from a drawdown arrangement, the fund at the medium rate of return will run out at the following ages: All benefits taken as Pension Reduced Pension plus PCLS Scottish Widows Retirement Account Please note that these results are dependent upon the assumptions used. Please see the Assumptions section for further details. 7

9 The Capital Value of Benefits Payable on Death before Retirement is based on both the lump sum benefits and spouse s pension under the member s existing pension scheme, as opposed to the value of the benefits on death if benefits are transferred to Scottish Widows Retirement Account. These are only calculated up to the normal retirement date of the DB scheme and allow for the DB pension to increase each year in line with RPI and be paid to a partner in line with average life expectancy. The figure in the Existing Scheme column is a notional figure that allows a comparison to be drawn with the figure in the Retirement Account columns. Capital Value of Benefits Payable on Death Before Retirement The figures below assume that the value of the investments in the proposed plan grow at the rate specified before charges are deducted. In order to compare the benefits payable on death before retirement from the existing scheme and proposed plan, the table below shows the capital value of providing the spouse s pension available from the existing scheme. Date Benefit Payable Existing Scheme Scottish Widows Retirement Account Low 2% Mid 5% High 8% Day One Lump Sum , , , Partners Pension 5, Capital Value 280, , , , Years Lump Sum , , , Partners Pension 5, Capital Value 276, , , , Years Lump Sum , , , Partners Pension 5, Capital Value 272, , , , Years Lump Sum , , , Partners Pension 6, Capital Value 256, , , , The Commutation Factor is essentially the amount of lump sum that is payable for each 1 of scheme income that is given up. This factor is set by the scheme. In the example opposite for every 1 of income that is given up 15 will be paid as a lump sum. For example, if the initial benefit under the DB scheme was an annual pension of 15,000 the client could exchange this for an annual pension of 13,000 and an initial lump sum of 30,000. This is known as the Pension Commencement Lump Sum. Commutation Factors The Scheme has stated that, the amount of Pension Commencement Lump Sum which is provided for each 1 of pension given up is currently as follows: Retirement at age 65-25/12/ :1 8

10 The Critical Yield figure is the estimated annual investment return that would need to be achieved to be able to provide benefits of equal value to the estimated compensation provided by the Pension Protection Fund on the member s 65th birthday. Pension Protection Fund The Pension Protection Fund(PPF) is a compulsory compensation scheme. Private Sector Defined Benefit schemes are required to pay a levy each year and in return the PPF provides a safety net for pension schemes when the sponsoring employer becomes insolvent and the scheme has insufficient funds to pay the promised benefits in full. The PPF provides compensation to scheme members but at a lower level than the full benefits promised by the existing scheme, which is not guaranteed. The PPF has the right to amend the level of compensation payable and will only pay the compensation benefits if it has sufficient funds. It is not underwritten by the Government. A further comparison has been made of the estimated benefits that may be provided by a transfer with the likely compensation benefits that would be provided if the scheme was taken over by the PPF. You would need to obtain an estimated annual investment return (Critical Yield), as shown below, from your Personal Pension or Buy-out policy, in order to provide benefits of equal value to the estimated compensation provided by the PPF on retirement on your 65th birthday / 25/12/2028. Proposed Retirement Date 25/12/2028 An Annual Pension of 11, p.a or A Pension Commencement Lump Sum of 60, and a reduced Annual Pension of 9, p.a. Critical Yield Yield All benefits taken as Pension Reduced Pension plus PCLS Scottish Widows Retirement Account 5.18% 4.72% Please note that these results are very dependent upon the assumptions used. Assumptions, relating specifically to the PPF, are as follows:- If a scheme becomes insolvent and is adopted by the Pension Protection Fund then certain scheme members will receive 100% compensation. These include those older than the scheme retirement age, those who are in receipt of an ill health pension and those receiving a survivor s pension. However, for the majority of scheme members the compensation they receive will be limited to 90% of the pension they are entitled to. This is also capped at a certain level which is referred to as the Compensation Cap. The table on the following page shows the limits that apply for members ages 46 to 65. Full details of the Compensation Cap can be found on the PPF website at: the date on which the sponsoring employer becomes insolvent. 3. Scheme Members Entitled to 90% Compensation All other scheme members will only receive compensation equal to 90% of the level of pension being received from their pension scheme. This compensation may be further reduced by the application of overall limits (Compensation Cap). The Cap is laid down in legislation for retirement (when payment of compensation commences) at age 65. Actuarial adjustments are made for other ages. After the reduction to 90%, the limits are currently as follows, and are reviewed annually in line with the National Average Earnings index: Retirement Age Limit of Compensation 65 34, , ,585 For members who had retired early, before the Assessment Date, the above limit is calculated according to their age at the date of assessment. If the member has previously taken a Pension Commencement Lump Sum then the compensation limit is applied to the total of the pension payable and the pension equivalent of the Pension Commencement Lump Sum taken. From 6 April 2017, the Long Service Cap came into effect for members who have 21 or more years' service in their scheme. For these members, the cap is increased by three per cent for each full year of pensionable service above 20 years, up to a maximum of double the standard cap. 9

11 COMPENSATION CAP LIMITS The table below shows the Pension Protection Fund Actuarial Factors from 1st April 2017 Compensation cap factors for determining PPF compensation and for S143 and S179 valuations. Age last birthday Factor Derived cap , , , , , , , , , , , , , , , , , , , , ,

12 USING THE TVAS REPORT TO ADVISE YOUR MEMBER Not every member is the same and therefore advising a member is not as simple as looking at the figures behind some of the key areas we ve highlighted. You could find you have two members with the same Critical Yield figure and yet a transfer may be right for one and not for the other. These key metrics are there to help you advise a member but they need to be factored in to each member s individual circumstances. Our leaflet Defined Benefits Advice has more information on this. The FCA also provides guidance on what they expect from advisers on their website at: 11

13 NEXT STEPS If you would like to find out more about how Scottish Widows can help your DB advice from start to finish then please visit our specialist team on or speak to your usual Scottish Widows contact. 12

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16 Scottish Widows Limited. Registered in England and Wales No Registered office in the United Kingdom at 25 Gresham Street, London EC2V 7HN. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number /18