Things to Consider

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Advantages and Disadvantages of the Offer

There are a number of advantages and disadvantages associated with accepting a transfer value and these are listed below:

Potential Advantages

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If you were to look for a transfer value at a future date, this enhancement may not be available. The transfer value at that point would be calculated on a standard transfer value basis which could be lower.
You gain control over the investment of the assets backing your pension benefits.
A transfer may allow you to take a higher retirement lump sum than under the existing DB plan.
You would have access to an ARF option upon retirement.
If you choose the ARF route, you can purchase an annuity at any point in the future.
Should you choose to purchase an annuity at retirement, you will have a much greater choice available, including improved annuity rates in cases of poor health.

Potential Disadvantages

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You will be exposed to investment risk. Market underperformance could result in lower benefits than you would have expected to receive from the existing DB plan.
As you get closer to your normal retirement age, the standard transfer value increases and may be higher than the enhanced transfer value on offer.
You will be exposed to longevity risk if you choose the ARF option. This is the risk that you could live longer than average and possible even run out of money in later life.
Using your fund to purchase an annuity could be more expensive than the expected cost of providing a pension from the DB scheme.

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There are risks involved in staying in the DB scheme
or indeed in accepting the ETV offer

There are three important considerations when deciding whether to remain in the DB Scheme or accept the ETV offer:

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Financial Security

Financial Security of the company and your benefits in the existing DB scheme.

Financial Security Risk

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Stay in the DB Scheme

The primary risk associated with membership of a DB pension scheme is that the scheme goes into windup with insufficient funds to cover its pension liabilities, either as a result of the Company failing or terminating its liability to contribute to the Scheme.

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Accept the ETV Offer

If you accept the ETV offer and transfer to a DC scheme, this risk will no longer apply.

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Investment Risk

All investments involve some degree of risk. In finance, risk refers to the degree of uncertainty and/or potential financial loss inherent in an investment decision. In general, as investment risks rise, investors seek higher returns to compensate themselves for taking such risks.

Investment Risk

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Stay in the DB Scheme

In your DB scheme, this risk is taken on by the company. If the scheme’s assets perform very well, the company may be in a position to reduce the level of contributions it pays into the scheme to provide for the future pensions of the members. However, if the assets perform poorly then the opposite would apply.

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Accept the ETV Offer

If you accept the ETV on offer, this investment risk then passes to you.

It is imperative that you understand the return required, if you were to invest your enhanced transfer value, in order to match your benefits that would be available from the DB scheme. You can then decide whether you are comfortable with the level of investment risk required to achieve this return.

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Following some simple rules can help you deal with investment risk.

Investment Risk Rules

Simple rules to help you deal with Investment risk

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The greater return you want, the more risk you'll usually have to accept.
The more risk you take with your investments, the greater the chance of losing some or all of your initial investment (your capital).
If you're saving over the short-term it's wise not to take much capital risk. So what you are investing for and when you'll need access to your money will have a big impact on what types of investments are right for you.
If you're investing for the long-term you can afford to take more risk as your money has more time to recover from falls in the markets.
Investing in equities has historically proved to be the best way for providing growth that outstrips inflation. There is a risk attached but, when you invest over the long-term, there is more time to recover your losses after a fall in the stock market.

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Longevity Risk

Longevity risk refers to the chance of you living beyond your life expectancy expectations.

Longevity Risk

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Stay in the DB Scheme

In a DB scheme, longevity risk is managed on a collective basis. There will be some members who prematurely pass away and they will effectively subsidise those members that live beyond the average life expectancy.

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Accept the ETV Offer

If you accept the ETV on offer, you are taking control of this longevity risk. If you prematurely pass away, there will likely be a larger capital value of your remaining pension funds that will be available to transfer to your loved ones. However, if you live a very long life and/or take too high an income from the remaining pension fund, there is a risk that you could run out of money.