56061 Understanding The Transfer Value Analysis …reference.scottishwidows.co.uk/docs/56061.pdf · 3 TVAS Report Analysis Report Introduction The purpose of this analysis is to provide

This information is for UK financial adviser use only and should not be distributed to

or relied upon by any other person.

UNDERSTANDING THE TRANSFER VALUE ANALYSIS (TVAS) REPORT

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INTRODUCTIONUNDERSTANDING 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.

Introduction

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Introduction

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TVAS Report

Analysis Report

Introduction

The purpose of this analysis is to provide information, regarding the possible transfer of your benefits provided by the ABCLimited 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 manyother factors, such as your “attitude to risk” your personal circumstances and your objectives. It does, however, give anindication of the likelihood of being able to match or exceed the benefits provided by your existing scheme with a transfer toan alternative plan.

We have been informed that the capitalised value of your benefits (transfer value) in the ABC Limited Retirement BenefitsScheme scheme is:

The report compares this with the benefits that can be purchased by transferring this value to:

This analysis needs to be read in conjunction with the illustrations provided by the recommended provider and anyrecommendations made by your adviser.

The analysis has been based on your personal information and the details supplied by the Scheme.

• £250,000.00 and is guaranteed until 01/07/2017.

• 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 specifiedannuity and Pension Commencement Lump Sum (PCLS), at the scheme retirement date (your 65th birthday) ofequal 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 specifiedannuity and PCLS, at the scheme retirement date (your 65th birthday) of equal value to the estimated startingbenefits, 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 thescheme retirement date (your 65th birthday) of equal value to the estimated benefits provided if the PPF takesover 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.

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Client Name: A N Other Adviser Name: IFA Name Case Reference: 718659

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.

capitalised value of your benefits

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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 65The pension benefits shown below have been calculated as at 01/04/2017, and are increased to your normal retirement dateas detailed in the record of input data. Your benefits are increased to the date of this analysis by applying the historicalrevaluation factors. From the date of this analysis to your normal retirement date, the benefits are increased in line with theprescribed assumptions. On this basis your pension at age 65 is estimated to be:

An Annual Pension of £14,106orA 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 mightbe less than the HMRC Maximum.

The Pension Commencement Lump Sum and reduced pension assume that the terms, under the existing scheme, for giving uppension for a Pension Commencement Lump Sum, remain unchanged.

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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 PensionThe below table shows the income options that could be available if the transfer was to go ahead to the proposedpension plan.

Estimated benefits from the existing scheme, calculated to be £14,106.75 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 £260,337.70 £365,860.23 £508,409.22Annuity single life level income. £11,911.75 £16,739.94 £23,262.27Age that drawdown fund will run out,assuming same income as an annuity is taken.

87 103 120+

Drawdown amount available to maintain alevel income to age 85*

£13,355.04 £24,649.13 £43,389.69

The below graph shows the projected pension benefits for the existing scheme with the income options that could beavailable if the transfer was to go ahead to the proposed pension plan. The incomes in the graph include a StatePension of £12,015.95 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. Thedrawdown income from the proposed plan is not guaranteed and will be dependent on future investment returns.

Age Existing Scheme Annuity Drawdown65 £14,106.75 £16,739.94 £24,649.1370 £29,078.12 £29,679.80 £37,588.9975 £33,193.84 £31,380.21 £39,289.3980 £37,989.51 £33,304.06 £41,213.2585 £43,580.99 £35,480.72 £18,740.78

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90 £50,104.40 £37,943.41 £21,203.47

*Target age calculated using ONS National Life Tables, Great Britain (2014-2016)

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90 £50,104.40 £37,943.41 £21,203.47


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Income Options Comparison at Retirement Age 65 - ReducedPension and Pension Commencement Lump SumThe below table shows the income options with Pension Commencement Lump Sum (PCLS) that could be available ifthe transfer was to go ahead to the proposed pension plan.

Estimated benefits from the existing scheme, calculated to be £9,766.21 per annum and PCLS of £65,108.09

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 £195,253.27 £274,395.17 £381,306.91PCLS £65,084.42 £91,465.05 £127,102.30Annuity single life level income. £8,933.81 £12,554.95 £17,446.70Age that drawdown fund will run out,assuming same income as an annuity is taken.

87 103 120+

Drawdown amount available to maintain alevel income to age 85*

£9,904.69 £18,260.10 £32,181.37

The below graph shows the projected pension benefits for the existing scheme with the income and PCLS options thatcould 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. Thedrawdown income from the proposed plan is not guaranteed and will be dependent on future investment returns.


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Analysis Results at your Proposed Retirement Age 65Annuity Purchase

Critical Yield

From the proposed plan you would need to obtain an estimated annual investment return as shown below, in order topurchase an annuity to provide benefits of equal value to the estimated benefits provided by the existing scheme atretirement. This return is known as the Critical Yield.

All benefits taken as Pension Reduced Pension plus PCLSScottish 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 existingscheme at retirement the estimated Fund Required, also known as the Capital Value is as follows:

All benefits taken as Pension Reduced Pension plus PCLSFund Required £538,804.93 £459,519.00

Hurdle Rate

From the proposed plan you would need to obtain an estimated annual investment return as shown below, in order topurchase an annuity to provide benefits of equal value to the estimated benefits provided by the existing schemeassuming 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 PCLSScottish 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 existingscheme, assuming no spouse’s pension, no increases in payment and no guarantee at retirement the estimated FundRequired, also known as the Capital Value is as follows:

All benefits taken as Pension Reduced Pension plus PCLSFund Required £308,310.50 £278,553.83

Drawdown Income

Assuming an income of equal value to the estimated benefits provided by the existing scheme, increasing by RPI perannum is taken from a drawdown arrangement, the fund at the medium rate of return will run out at the followingages:

All benefits taken as Pension Reduced Pension plus PCLSScottish Widows Retirement Account 94 101

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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.

Critical Yield

Hurdle Rate

Drawdown Income

Please note that these results are dependent upon the assumptions used. Please see the Assumptions section for further details.

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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 RetirementThe figures below assume that the value of the investments in the proposed plan grow at the rate specified beforecharges are deducted.

In order to compare the benefits payable on death before retirement from the existing scheme and proposed plan, thetable below shows the capital value of providing the spouse’s pension available from the existing scheme.

Date Benefit Payable Existing Scheme Scottish Widows Retirement AccountLow 2% Mid 5% High 8%

Day One Lump Sum £0.00 £242,500.00 £242,500.00 £242,500.00Partners Pension £5,000.00 £0.00 £0.00 £0.00Capital Value £280,534.74 £242,500.00 £242,500.00 £242,500.00

2 Years Lump Sum £0.00 £245,328.42 £260,123.45 £275,257.34Partners Pension £5,276.44 £0.00 £0.00 £0.00Capital Value £276,651.11 £245,328.42 £260,123.45 £275,257.34



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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.

Transfer Value InformationTransfer Total Value £250,000.00Money Purchase AVC (included in transfer value) £0.00Assumed Rebate to be received in relation to LimitedRevaluation Premium

£0.00

Transfer Value Guaranteed until Is guaranteed until 01/07/2017.GMP Cash Equivalent / Pre 97 Protected Rights TransferValue

£50,000.00

Post 97 S9(2b) / Protected Rights Transfer Value £150,000.00

PCLS by CommutationsPension Commencement Lump Sum as at A-Day £0.00Total Pension as at A-Day £0.00Analysis based on commuting pension for PensionCommencement Lump Sum?

Yes

Scheme Factor as at NRA 15:1

Primary GroupBenefit Type Amount As At Revaluation Escalation Spouse % DAR G'tee YrsPre 88 GMP** £350.00 per

annum01/11/2016 4.75% to age

60*0% 50% 5

Post 88 GMP £650.00 perannum

01/11/2016 4.75% to age60

CPI, max 5%p.a.

50% 5

Pre 97 NonGMP

£2,000.00 perannum

01/11/2016 RPI, max 5%p.a. to age 65

RPI, max 0%p.a.

50% 5

Post 97 NonGMP

£7,000.00 perannum

01/11/2016 RPI, max 5%p.a. to age 65

RPI, max 5%p.a.

50% 5

* GMP is revalued up until GMP age 60 using the revaluation as above, increases in payment begin once you reachGMP age.

** As the scheme has been “contracted out” of the State Second Pension (S2P), it must provide a minimum level ofpension, which is broadly equivalent to the amount of State pension given up. This pension is called the GuaranteedMinimum Pension.

Commutation Factors

The Scheme has stated that, the amount of Pension Commencement Lump Sum which is provided for each £1 ofpension given up is currently as follows:

Retirement at age 65 - 25/12/2028 15:1

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Capital Value of Benefits Payable on Death Before Retirement

Commutation Factors

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Pension Protection FundThe Pension Protection Fund(PPF) is a compulsory compensation scheme. Private Sector Defined Benefit schemes arerequired to pay a levy each year and in return the PPF provides a “safety net” for pension schemes when the sponsoringemployer becomes insolvent and the scheme has insufficient funds to pay the promised benefits in full. The PPF providescompensation to scheme members but at a lower level than the full benefits promised by the existing scheme, which is notguaranteed. The PPF has the right to amend the level of compensation payable and will only pay the compensation benefits ifit 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 likelycompensation 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 Pensionor Buy-out policy, in order to provide benefits of equal value to the estimated compensation provided by the PPF onretirement on your 65th birthday / 25/12/2028.

Please note that these results are very dependent upon the assumptions used. Assumptions, relating specifically to the PPF,are as follows:-

Proposed Retirement Date – 25/12/2028

An Annual Pension of £11,614.15 p.aorA Pension Commencement Lump Sum of £60,802.68 and a reduced Annual Pension of £9,180.01 p.a.

Critical YieldAll benefits taken as Pension Reduced Pension plus PCLS

Scottish Widows Retirement Account 5.18% 4.72%

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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 Assumptions

The usual explanation of benefits provided by the PPF, namely that scheme members, over retirement age, will receive 100%of their existing entitlement and that scheme members who have not reached retirement age will receive 90% of their existingentitlement, is not only simplistic, it is also misleading. The benefits that the PPF provides are summarised below:

1. Rate for Commuting Pension for a Pension Commencement Lump Sum

This assumption only affects the required investment return (Critical Yield) if the Pension Commencement Lump Sumoption is chosen. The rate varies between pre and post 97 benefits, age at retirement and whether a spouse's pensionis included.It has been assumed that current rates will still apply at your retirement age 65.

2. Scheme Members Entitled to 100% Compensation

The following scheme members will receive compensation equal to the level of pension being received from theirpension scheme. No limits apply to the amount of compensation payable.• Members who are over the scheme retirement age, on the day before the Assessment Date.• Members who are younger than the scheme retirement age, but are in receipt of an ill health pension.• Individuals in receipt of a survivor’s pension.The Assessment Date is the date on which the pension scheme first becomes eligible to join the PPF. This is normallythe 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 fromtheir pension scheme. This compensation may be further reduced by the application of overall limits (CompensationCap). 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 arereviewed annually in line with the National Average Earnings index:Retirement Age Limit of Compensation65 £34,65560 £29,49355 £25,585

For members who had retired early, before the Assessment Date, the above limit is calculated according to their ageat the date of assessment. If the member has previously taken a Pension Commencement Lump Sum then thecompensation limit is applied to the total of the pension payable and the pension equivalent of the PensionCommencement Lump Sum taken.

From 6 April 2017, the Long Service Cap came into effect for members who have 21 or more years' service in theirscheme. For these members, the cap is increased by three per cent for each full year of pensionable service above 20years, up to a maximum of double the standard cap.

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Critical Yield

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:

www.pensionprotectionfund.org.uk/DocumentLibrary/Documents/Compensation_Cap_factors_April_2017.pdf

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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 £

45 0.6078787 23,406.74

46 0.6187936 23,827.03

47 0.6300861 24,261.85

48 0.6417970 24,712.79

49 0.6539701 25,181.52

50 0.6666517 25,669.83

51 0.6798849 26,179.39

52 0.6935876 26,707.01

53 0.7078058 27,254.50

54 0.7225805 27,823.40

55 0.7382643 28,427.32

56 0.7583446 29,200.52

57 0.7796095 30,019.34

58 0.8021108 30,885.77

59 0.8259025 31,801.88

60 0.8510441 32,769.97

61 0.8776063 33,792.77

62 0.9056603 34,873.00

63 0.9353093 36,014.66

64 0.9667033 37,223.50

65 1.0000000 38,505.61

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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:

https://www.fca.org.uk/news/news-stories/advising-pension-transfers-our-expectations

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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 www.scottishwidows.co.uk/defined-benefit,

email our specialist team on [email protected] or speak to your usual Scottish Widows contact.

http://www.scottishwidows.co.uk/defined-benefit

Scottish Widows Limited. Registered in England and Wales No. 3196171. 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 181655.

56061 04/18