CETV Worked Example: How a DB Pension Transfer Value Is Set

The clearest way to understand how a transfer value is built is to walk through a worked example. The figures below are illustrative throughout. They are designed to show the method an actuary follows, not to predict what any real scheme would offer.

In short

• A CETV starts from your accrued pension and projects it forward with assumed increases.
• The projected income is discounted back to today using a rate tied to gilt yields.
• Spouse's benefits and inflation-linking add to the value.
• Every number in this example is illustrative, not a quotation.
• Real values come only from your scheme, and over £30,000 require regulated advice to transfer.

The starting point

Imagine a member, aged 50, with a deferred defined benefit pension of £8,000 a year, payable from age 65. The scheme increases pensions in line with inflation, capped, and pays a spouse's pension of half the member's amount on death. These features all feed into the value.

Step one: project the income

The actuary first estimates what the £8,000 will have grown to by retirement, applying the scheme's assumed inflation increases over the fifteen years to age 65. It then assumes how long the pension is likely to be paid, using life expectancy, and adds the expected cost of the spouse's pension.

Step two: discount it back to today

Future pounds are worth less than pounds today, so the projected income stream is discounted back to a present-day value. The discount rate is anchored to gilt yields. A lower discount rate produces a larger present value, which is why low gilt yields inflate CETVs and higher yields shrink them.

An illustrative result

In this illustration a multiple of twenty-four times the annual pension produces a value of around £192,000. Change the gilt yield assumption and the multiple, and therefore the value, moves. A richer inflation cap or a more generous spouse's pension would push it higher; a higher discount rate would pull it lower. None of these figures should be read as what a real scheme would quote.

Why the method matters more than the number

Understanding the steps explains why your value behaves as it does. It is not a reflection of what you paid in, and it is not fixed. It is a market-sensitive present value of a guaranteed promise. That is also why a transfer hands you investment and longevity risk that the scheme currently carries. For safeguarded benefits over £30,000, weighing that trade-off requires regulated advice from a pension transfer specialist.

FAQ

How is a CETV worked out step by step?

The actuary projects your accrued pension forward with assumed increases, estimates how long it will be paid, adds spouse's benefits, then discounts the total back to a present value using a rate tied to gilt yields.

Are the figures in this example real?

No. Every number is illustrative and chosen to show the method. Only your scheme can produce a genuine transfer value for your benefits.

Why does the discount rate matter so much?

It converts future income into a value today. A lower rate, linked to lower gilt yields, produces a larger present value, so it raises the CETV.

Does a spouse's pension increase the value?

Yes. Survivor benefits cost more to fund, so a scheme that provides them will tend to produce a higher transfer value, all else being equal.

Do I need advice to act on a real value?

If your safeguarded benefits exceed £30,000 you must take regulated advice from a pension transfer specialist before transferring out.