Pension Transfer Analysis Report (TVAS) is a report in relation to defined benefit (commonly referred to as final salary) pension schemes. For any defined benefit schemes that have a CETV equal to or exceeding £30,000, a report is required from a regulated UK financial adviser.
The reports themselves are very in depth and take into account many factors. Which is rightly so, as defined benefit pensions are rare in this day and age and the benefits are hard to replicate.
What is a Defined Benefit (DB) pension scheme?
A defined benefit pension scheme is a form of pension that pays a guaranteed income. The income is guaranteed until death, and is usually index linked meaning it rises in line with inflation. Compared to defined contribution schemes, which are a pot to draw down from, the schemes are not accessible flexibly and the income is paid monthly.
Defined benefit pensions are known as the ‘gold standard’ of pension schemes. Having a guaranteed annual income that is index linked is increasingly rare, and with individuals living longer, the more important they are. Furthermore, on death, the scheme will usually pay 50% of your annual entitlement to a spouse or eligible dependent.
The benefits are similarly replicable to a state pension. When you factor this into the context of a retirement plan, the benefits and power of the schemes are highlighted.
When would I transfer a Defined Benefit (DB) scheme?
The FCA state that when assessing a defined benefit pension transfer, you should always start from the view point that a transfer would not be suitable. And for the vast majority of people, this is the case.
As stated above, the guaranteed and index-linked nature of DB schemes is hard to replicate. Therefore, there must be a good reason for transferring your pension.
Common reasons are:
- Ill health and thus wanting to maximise benefits passed to a beneficiary
- Large forms of guaranteed income from other schemes/pensions
- Very generous CETV based on the annual benefit – if one of the above criteria is met
The above situations are not exclusive. They need to be taken into consideration with your overall circumstances to form a conclusion as to whether a transfer is suitable.
You can request a cash equivalent transfer value from your scheme if you are thinking of transferring. A CETV is a lump sum your scheme will pay you for giving up your DB scheme benefits. The CETV value depends on many factors such as:
- Life expectancy (health)
- Long term gilt rates
- Age and scheme’s retirement age
- Scheme’s current position – do they want to encourage you to transfer out
Who can prepare a TVAS report?
For defined benefit transfers exceeding £30,000, it is a regulatory requirement to seek advice from an FCA regulated adviser. This is to ensure that consumers (the pension holders) are provided the highest level of transfer advice available.
Areas covered in a TVAS report
Risk profile – Risk profile is important as when you transfer you scheme, your pension is subject to market fluctuations. For cautious investors, this can cause a lot of stress.
Capacity for loss – Looking at your capacity for loss is integral when assessing transfer suitability. If the markets dropped by 30%, how would you be affected?
Critical yield – Critical yield is a measurement to determine the investment return required to match the benefits currently on offer by your DB scheme. It’s an important calculation that provides a quantitative measure.
Other sources of income – By looking at the other sources of guaranteed income you have, you can determine how reliant you are on the DB scheme. If you have no other DB schemes and and no state pension entitlement, it’s hard to justify transferring your only guaranteed source of income.
Death benefits – The death benefits between a DB and DC scheme differs. Taking into consideration your health and potential longevity is an area the report focuses on.
The report will finally come to a conclusion over whether a transfer is in your best interests. Generally, the advice is not to transfer. It’s hard for advisers to justify a transfer considering what the pension holder is giving up.
Depending on the advice, clients may then go down the ‘insistent client’ route where they can elect to ignore the advice and proceed with a transfer.
Poor advice has been commonplace in the past, particularly in relation to DB schemes. Taking appropriate advice from a regulated UK financial adviser is a requirement, but also ensuring they have a good reputation for advising in your best interests is integral.
If you want to discuss your options regarding your UK pension scheme, please get in touch.