Case study
How a transfer value can hide nearly half of what a defined benefit pension is really worth.
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General information, not advice on your own case.
Based on a real case. The details have been anonymised and some figures rounded, so that no one involved can be identified.
A divorcing couple, one of them with a large private-sector final-salary pension. Asked what it was worth, the scheme did what schemes do and quoted a transfer value: about £325,000. That was the number on the table to divide or to offset against.
There is the figure. Split it, or balance it against the other assets, at £325,000.
A proper fair-value calculation, what it would actually cost to buy the same guaranteed, inflation-linked income on the open market, put the pension at about £612,000. Nearly double the transfer value. The scheme's number was not "wrong"; it was simply built on the scheme's own cautious assumptions rather than on what the pension is really worth to the two people dividing it. The tell was in the income: every £1,000 of this pension bought around £105 a year of retirement income inside the scheme, while the same £1,000 moved to an ordinary personal pension would have bought only about £76 a year.
The transfer value said £325,000. Its fair value was £612,000. Nearly £290,000 of pension wealth the statement did not show.
Had they simply divided the £325,000 transfer value, close to £290,000 of real pension wealth would have been invisible, and the spouse without the pension would have settled for a share of a number that was itself little more than half the truth. A fair division needed a much larger share, or a much larger offset, than the transfer value implied.
For a defined benefit or public-sector pension, the transfer value is a starting point, not the answer. It and an independent valuation are two different calculations on two different bases, so the two numbers rarely agree. In this case the gap ran one way, and it was worth nearly £290,000. It does not always run that way: for plenty of schemes the transfer value comes out higher than an independent valuation. Only a proper calculation shows which way it runs, and by how much, which is why the figure on the statement is not something to divide on unexamined.
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