What is a transfer value and how does it work?
12 Apr 2022
Whilst you were paying into the AA Pension Scheme, you built up an annual pension that is payable for life. This is known as a Defined Benefit (DB) pension scheme. Now that you have stopped paying in, you have some options available to you in relation to your AA pension.
You can access your AA pension from the age of 55 or you have the option to transfer the value of your pension to another registered pension scheme from any age. This process involves getting a quotation on your current annual pension to get a cash equivalent lump sum. This is known as a cash equivalent transfer value (CETV).
The CETV is calculated by a number of different factors that is specific to your membership, so you will need to request a transfer value quotation from the Scheme Administrator, Aon, to see the exact value of the CETV that your annual pension can be exchanged for. Within the Scheme you have the right, each year, to ask for a free transfer value of your current pension entitlement. Additional requests for a CETV quotation within the same the 12-month period will be chargeable.
Transferring your AA pension to a Defined Contribution (DC) scheme
Transferring your AA pension to a DC scheme can give you more flexibility on how you can use your pension but there are certain things you need to carefully consider.
Your AA pension is an annual pension that is guaranteed to be paid for the rest of your life and, once in payment, increases each year to help protect your income against inflation. There are also generous benefits for your loved ones if you die before taking your pension. Transferring your AA pension to a DC scheme is irreversible and you will lose out on the financial protection that is currently offered to members.
If you transfer to a DC scheme, you’re giving up a guaranteed income for life for a cash lump sum that is invested and the value can go up and down depending on the investment performance. You will also more than likely pay additional charges for the fees associated with the pension scheme’s management fees. This is normally a percentage of your pension value or a fixed annual fee.
You do have the option to purchase an annual pension through an insurance product (known as an annuity), but it is unlikely to have the same value for money as keeping your existing annual pension in your AA Pension Scheme. You can find out more information about transferring your AA pension here.
Before you make any decision, it’s vital to take independent financial advice first, as a pension transfer is final. Therefore, any decision needs to be based on a careful assessment of all your circumstances to ensure it’s right for you. New rules are also in place that you must prove that you have received independent financial advice if your CETV is over the value of £30,000. You can find an independent financial adviser authorised by the Financial Conduct Authority here.