How to Calculate a Defined Benefit Cash Equivalent Transfer Value
Published / Last Updated on 14/04/2020
We explain how to calculate a defined benefit cash equivalent transfer value (CETV) using pension income, revaluation of pension income, annuity rates and discounting for future assumed investment growth.
Example Defined Benefit Scheme: worked and member pension scheme for 30 years. It is a 60th scheme. Your salary when you left at 60 was £20,000pa. Normal retirement age is 65.
P R A D
P = Pension
- Your pension is 30/60ths of your salary when you left 30/60 X £20,000 = £10,000 pa
R = Revaluation
- Your pension is revalued to allow for inflation, from age 60 to retirement age 65. E.g. at 2.5%pa.
- £10,000 pa X 2.5% pa compounded over 5 years = £11,314 pa (your revalued/projected pension)
A = Annuity cost
- The estimated cost to buy an annuity with inflation protection and 50% spouses benefit = 2%
- £11,314 divided by 2% = £564,704.
- This is the real cost today for your pension scheme to buy your annuity pension income.
BUT, you are only 60 and have 5 years to go, so the pension scheme can make an assumption that your pension transfer will grow e.g. at 4% pa.
D = Discount (investment discount allowed from now to age 60)
- £564,704 divided by compound decrement of 4% pa over 5 years = £464,967.
The cash equivalent transfer value in this example could be £464,967 although schemes are allowed to make some adjustments to assumptions for inflation, investment returns, annuity rates that will affect the transfer value and that is our job to work out whether this is good value for you.
