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Pensions - how are they valued

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Pensions are a hugely complex area but in very basic terms, if you have a money purchase scheme (ie. Not linked to your salary in any way), this will be valued by reference to the cash equivalent transfer value or CETV.

This means that an actuary employed by your pension company will, if you ask them, calculate a figure that represents the value of your investment if you were to transfer it from one insurance company to another.

If your pension is in payment ie. You are receiving your pension income, then your pension will be valued again by an actuary employed by your pension company, but you ask for the cash equivalent benefit value, or CETB.

Sometimes, these values are challenged and an independent actuary is asked to prepare a report.  The ways in which CETVs are calculated can differ, so if you each have a pension scheme, it is important that each scheme is valued in the same way.

Final salary schemes are a lot more complicated.  They have benefits linked to your salary.  If they are occupational public sector final salary schemes the pension trustees will often insist on the money invested remaining with for example the NHS, or Local Authority.  They often carry with them death benefits ie. A lump sum and annual pension payable to a widow or widower in the event of death, as well as a lump sum payable on retirement, and options to take a larger lump sum and smaller pension, or retire early.  All of these benefits need to be factored in when valuations are requested.  If you are asked for a CETV, public sector pension trustees can take up to 3 months to produce a value and, if you ask for more than one value in 12 months, they can also ask for a fairly hefty fee.

If you divorce, there is a form to be sent to your pension trustees for them to complete with the relevant information.  This is known as form P.

Pensions can be a minefield, and it is important that you do not get dragged into getting costly reports that you don’t need, and that the Court won’t be interested in.  In some cases actuarial reports about the values of pensions over and above a basic CETV are very necessary to achieve a fair result, but in a number of cases, they are not.

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