I am wondering if you can help and explain how the following can happen as I don’t seem to be getting anywhere with the two pension companies involved.
My husband and I both have a work pension.
Mine was paid into from 1987 to 2003. I paid in only £3,000 in total for the whole period of nearly 16 years and it is due to pay me out about £5,000 per year when I retire in 2031. Transfer value is £225,000.
Perplexing question: How can two vastly different sized pensions have the same transfer values? (Stock image)
My husband pays into his about £6,000 and his company £11,000 per year and he has held it for 15 years. The amount he is due to get per year is £14,000 (today’s value if he doesn’t pay any more in) retiring in 2032. Transfer value is £223,000.
We have been trying to work out why the transfer values are so similar but the payouts per year so different – really hope you can shed some light on it because it is driving us both mad.
SCROLL DOWN TO FIND OUT HOW TO ASK YOUR PENSION QUESTION
Steve Webb replies: I can entirely understand why you are surprised to be offered roughly the same amount of money for two pensions which seem to be so different. I hope that I can help to clarify.
There are a number of factors which can affect the value of a salary-related pension.
What is a salary-related pension?
Also known as defined benefit or final salary, this type of pension provides a guaranteed income after retirement until you die.
They are typically generous, with inflation protection and death benefits for spouses.
Most private sector employers have now replaced them with stingier and riskier defined contribution pensions.
These take contributions from both employer and employee and invest them to provide a pot of money at retirement, but the worker bears all the investment risk. This is Money
It’s not necessarily about what you pay in, as you have discovered, because even if your employer made contributions to your pension that you haven’t mentioned, you appear to have put in substantially less than your husband over the years.
The amount payable at retirement is clearly an important factor, but it is far from the only one.
Some of the others are as follows:
1) Pension age
Some pensions are payable at 60, some at 65 and some at other ages.
It clearly makes a huge difference to the value of a pension if it has to be paid for an extra five years, so the transfer value offered will tend to be larger the lower the pension age in the scheme.
2) Annual increases
Although the law specifies a minimum level of annual pension increases through retirement, many pension schemes offer more generous annual increases.
For example, the legal minimum doesn’t require any inflation protection for the pension you built up before 1997, but more generous schemes will provide inflation protection for those years of service.
Similarly, some schemes provide an uplift in line with inflation as measured by the Consumer Prices Index but others use inflation as measured by the usually higher Retail Prices Index.
You will generally be offered a higher transfer value for a pension which benefits from generous indexation.
Did you receive Family Credit between 1995 and 2001?
If you got either this benefit or Working Families Tax Credit at any time during those years, it counted towards your state pension and could give it a boost.
Steve Webb would like to hear from anyone who got these credits back then, whether you are already drawing a state pension or are yet to do so.
You can write to Steve at email@example.com and we will forward your messages.
Please put FAMILY CREDIT in the subject line.
3) Provision for surviving spouses
As with protection for inflation, there is a statutory minimum level of provision for widows/widowers which schemes have to offer, but many offer more.
If one scheme offers a generous pension to widows and another offers the legal minimum, the transfer value on the more generous scheme will be higher, other things being equal.
4) Funding level
As well as the generosity of the benefits, the transfer value you are offered will reflect some other factors, including the funding level of the scheme.
If the scheme is running a deficit – so that the amount of money put aside is not expected to be enough to meet all the future pension promises – the scheme is allowed to make a reduction in the transfer value that they offer you.
If they did not do this then lots of people might transfer out and get 100 per cent of the value of their benefits, and this could worsen the position of the people who are left behind.
Steve Webb: Find out how to ask the former Pensions Minister a question about your retirement savings in the box below
5) Investment choices
The key point to understand is that in offering you a transfer value, the scheme is thinking about how much it would cost it to pay you the benefits you have been promised.
As well as the generosity of the benefits on offer, this will also depend on how the scheme’s money is invested.
You may find that a ‘mature’ scheme with lots of pensioner members and few working age members has most of its money invested in low-risk, low-return assets.
This may mean that providing for future benefits is relatively expensive.
As a result, they may be quite pleased to see you leave and will offer you a relatively high transfer value.
Ask your scheme how transfer value was calculated
Working out transfer values is done within a legal framework but there is a lot of scope for discretion in the assumptions that the scheme makes, so there isn’t a single right answer as to what your pension is worth.
In some cases genuine mistakes are made and you should certainly ask for a written explanation of how the transfer value has been calculated.
But I hope that this reply gives you some further clues as to why your and your husband have been offered roughly the same amount for what appear to be very different benefits.
ASK STEVE WEBB A PENSION QUESTION
Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.
He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.
Since leaving the Department of Work and Pensions after the May 2015 election, Steve has joined pension firm Royal London as director of policy.
If you would like to ask Steve a question about pensions, please email him at firstname.lastname@example.org.
Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
Please include a daytime contact number with your message – this will be kept confidential and not used for marketing purposes.
If Steve is unable to answer your question, you can also contact The Pensions Advisory Service, a Government-backed organisation which gives free help to the public. TPAS can be found here and its number is 0800 011 3797.
Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve’s several earlier columns about state pension forecasts and contracting out, which might be helpful.
If you have a question about state pension top-ups, Steve has written a guide which you can find here.