Don’t be shy, ask ii…how do I value my final salary pension schemes?

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Tim Day asks:I have consolidated various former employers' Defined Contribution (DC) pension schemes in a SIPP on the interactive investor platform.

The five-year freeze to the Lifetime Allowance (LTA), announced in the latest Budget*, is making me ponder the increased likelihood of reaching and exceeding that amount. 

It would be clear enough if SIPPs were my sole pension and there was a straightforward asset value, but my situation is complicated by having about a decade accrued in two Defined Benefit (DB) schemes from earlier in my career. How should I account for the value of those?

Presumably, I should contact the schemes and ask them for some sort of valuation, but what exactly should I ask them for, and if I did have such a valuation is there any way of predicting how it might evolve in future?

Thanks for any pointers, Tim

*On 3 March 2021, chancellor Rishi Sunak said the LTA’s annual link to the Consumer Price Index increase would be removed for the next five fiscal years. This will maintain the standard lifetime allowance at £1,073,100 for tax years 2021 to 2022 to 2025 to 2026.

Becky O’Connor (pictured above), head of pensions & savings, interactive investor, says: You are right in thinking that your DB schemes would count towards your Lifetime Allowance and that this would require valuations from your providers. 

Defined Benefit scheme providers usually come up with a notional capital value for DB pensions by multiplying your retirement income (by 20) and adding the value of any tax-free cash lump sum.

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It would be the valuation at the point you first access, or ‘crystallise’ your pension that would be taken into account for calculating your pension value in relation to the LTA.  

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There are two points at which this valuation occurs – when you first access your pension and when you are 75.

In terms of predicting what the whole pot will be worth – this is tricky as it will depend on investment growth as well as how much you contribute. Mid-range forecasts are given on annual statements, but the eventual outcome can be higher or lower. 

At the point of leaving your schemes, you should have been provided with a statement of benefits which would show benefits accrued to the date of leaving, then a projection of what your deferred pension will be at the Scheme Normal Retirement Date (NRD). If you don’t have these, you should request copies from your providers, which should give a good indicator and the annual rate of pension where the factor is then used to get the value.

Given your concerns, we would suggest that you either seek the guidance of a suitably qualified financial adviser, or speak with your accountant who will be able to provide you with the advice you need, based on your own personal circumstances.  

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If you suspect you might end up over the LTA threshold, keep things under close review. If you go over, you have to pay a tax charge – it is not an absolute limit beyond which you can no longer make contributions.

In some cases, it can be worth continuing to pay in, despite going over the LTA limit. 

You can read more about the Lifetime Allowance here.