Transferring your pension – what are the options?
There’s lots of reasons you might want to consider transferring your pension, but before you do so, make sure you understand exactly what’s involved, and the pros and cons of moving.
Reasons why you might want to move your pension to a different provider include: ● You’re changing jobs ● You want to bring all your pensions together under the same roof ● You’ve found a better or cheaper scheme elsewhere ● Your current pension scheme is closing ● You want more flexibility Here, we look at some of the things you need to think about if you’re looking to transfer. If you’re uncertain how to proceed, or whether transferring is the right thing to do, always seek professional financial advice first.
Transferring from a defined contribution pension into another defined contribution pension
Most people have defined contribution pensions, where the amount they’ll receive at retirement depends on how much they’ve paid in, how much their employer has contributed, and how the funds their pension has been invested in have performed. You might decide to transfer from one defined contribution scheme pension to another at some point, perhaps because you want to consolidate lots of small pension pots built up during your working lifetime, or because you want access to a wider choice of investments, or to pay lower fees – or simply because you’ve started working for a new employer. Transfer options include either a personal pension, a new employer’s scheme, a self-invested personal pension (SIPP) or a stakeholder pension. You can usually transfer at any time up to a year before you expect to start taking your retirement benefits.
Once you’ve decided where you want to transfer your savings, ask your existing pension provider for a transfer value. If this is lower than the value of your retirement savings, this means you’re likely to incur a penalty to make the transfer, so make sure you’re clear exactly how much you’ll have to pay.
“In some cases, we’ve seen penalties as high as 30% when customers have wanted to transfer their pension. Any pension advice you receive should always take any penalties and future charges into account and advise whether it’s cost effective for you to transfer.”
When choosing a new provider, check whether there are any set-up charges, and whether you’ll have to commit to making regular payments. You should also find out which investment funds are offered, and whether these are suitable for you based on your approach to risk and your investment timeframe. Always do plenty of research before moving your pension savings, and if you’re not sure which scheme is right for you, get professional help and make sure the company you’re dealing with is authorised and regulated by the Financial Conduct Authority.
Transferring from a defined benefit pension into a defined contribution pension
A final salary or a defined benefit pension pays you a guaranteed level of income when you retire, based on your salary and the number of years you’ve been a member of the pension scheme. In many cases this may be better than the income generated by a defined contribution pension, so you should think very carefully before moving out of this type of scheme.
Despite this, transfers out of final salary schemes have become more popular in recent years following the introduction of pension freedoms in 2015, which enable people with defined contribution schemes greater flexibility, including the ability to pass on pension savings when they die. With a defined benefit scheme, while you can make provision for a pension to be paid to your surviving spouse after you die, you cannot pass on the cash value of your pension.
If you’re thinking about transferring from a defined benefit pension into any type of defined contribution pension such as a personal pension, self-invested personal pension (SIPP) or stakeholder pension, and the transfer value of your pension is worth more than £30,000, then by law you must get independent advice first. If following advice, you decide transferring your final salary pension is right for you, your scheme provider will give you a ‘cash equivalent transfer value', which is calculated by your final salary scheme, which you can then invest in a new pension scheme. Advising on transfers from a defined benefit pension scheme is a specialist area and Profile Pensions have chosen not to provide advice on this type of pension transfer. You may also have seen recent publicity about pension scams, where people have been cheated out of the money in their pension or it’s been invested into assets which lock up their money for a long time. Take great care when acting on advice to transfer out of a defined benefit scheme and if something sounds too good to be true, it probably is.
Before you transfer
Make sure you’re fully aware of any extra benefits or guarantees you may lose when you transfer away from your existing pension. For example, your current pension might provide you with extra death benefits, the right to take out your money at a certain age, or a guaranteed income. It could also allow you to take a tax-free lump sum of more than 25% of your pension fund value, or it might provide you with fixed or enhanced protection, which increases your lifetime allowance. The lifetime allowance, currently £1m in the 2018/19 tax year, is the maximum total amount you can save into your pension funds without being subject to additional tax charges when you withdraw money. If you’re not sure, ask us - we’re fully authorised to give pension advice by the FCA and have been helping customers for over five years and advise on over £750m worth of retirement funds for our customers. Remember, you’ve worked hard for your retirement savings, so you don’t want to miss out on any benefits which could help give you the lifestyle you want in retirement. Equally, it’s vital to ensure your pension pot is working as hard as possible for you and your family, so you should regularly check how your savings are performing and whether they could be doing better elsewhere.