Earlier companies used to give their employees pensions based on tenure and earnings, a pension scheme known as defined benefit or DB pensions. Now, more and more people are being offered handsome cash sums, known as Enhanced Transfer Value (ETV), to give their rights to a defined benefit (DB) pension scheme. However, there is an ongoing debate among employees about whether ETV is beneficial for them or it is another financial trap.
Fortunately, simple math in conjunction with your situation is sufficient to choose the best option for you. To help you make an informed financial decision, this guide lays out 5 factual reasons to opt for an enhanced transfer value when offered.
What is ETV?
An Enhanced Transfer Value (ETV) is a one-time sum offered to employees to transfer the rights and value of their funds from Defined Benefit (DB) pensions to a private pension arrangement.
Essentially this package is formulated to offer enhanced benefits to members by giving a value of 20-30 times their annual retirement package. In addition to the value of the existing pension, additional benefits are also offered to safeguard their financial future.
Here is an example – Mr. A has €150,000 as the value of the existing pension. Now, he is offered a 30% Enhanced Transfer Value to leave the DB scheme. It translates to a sum of €195,000. Therefore, Mr. A can accept this “buyout” and move into a new scheme.
Here are some good reasons to opt for an enhanced transfer value
Flexibility
Option for ETV comes with a sense of complete freedom and flexibility. Unlike the DB pension scheme, it is not rigid in terms of pension age and rigid terms. For instance, you don’t have to wait till the age of 65 to access the full benefits of your pension pot. Further, with private pension arrangements, you can include your dependents and their share as per your wish.
Similarly, it is also flexible in terms of what you do with your money. For instance, as per your future planning, you can spread out the money and access it accordingly. Early access to pension money lets you plan your pre- and post-retirement systematically.
Access to Tax-Free Cash
Most people prefer to opt for ETV because it makes them eligible to draw a larger tax-free cash lump sum. However, if you remain in the DB scheme, you may not have access to such a tax-free lump sum without giving up some benefits. Moreover, DB schemes do not offer more tax benefits than other private pension schemes. For example, most schemes let members withdraw 25% (or up to €200,000) tax-free.
Inheritance
One of the biggest drawbacks of the DB pension scheme is its inheritance model. In the event of your death, your widow/widower gets 50% of the fund. Further, if your widow/ widower dies, the pension also dies. This scheme doesn’t give preference to your other dependents. Therefore if you want to transfer your funds to your desired beneficiaries, opting for ETV makes a lot of sense.
Furthermore, other private pension schemes also offer better tax benefits for your beneficiaries when they access your pension pot.
Health
While the DB pension scheme is beneficial for persons who live long after age 65, it doesn’t offer much to people who die early after retirement. For instance, a person who dies at 70 gets less out of a pension scheme than someone who lives till their nineties.
Although it is impossible to predict someone’s death, if you think your life expectancy is on the short side, opt for ETV. You can invest and allocate the fund to your beneficiaries accordingly.
Volatility
Perhaps with the DB scheme, you do not have control over your fund. However, if you transfer out, you can diversify your funds to beat the volatile market. It means your fund will grow and beat inflation. Similarly, in case your employer goes bankrupt, there are chances of losing 10% of your pension fund in the DB scheme.
Conclusion
Irrespective of the pros and cons of the Enhanced Transfer Value scheme, the final decision rests with your unique situation. However, you should opt for enhanced transfer value if you want more control over your pension fund, avail of tax benefits, and beat the market volatility.
Further, every individual has a different financial situation, so it is advised to consult a professional financial advisor to achieve your retirement goals.