Should I Transfer My Pensions?

Why Transfer a Pension?

You might transfer your pensions because…

• You want to consolidate multiple pensions into bigger pots
• You’ve changed jobs
• You’re looking to pay less in fees and charges
• You want access to a wider range of funds
• Your pension scheme is being closed.

Pension Consolidation

One of the biggest reasons people transfer their retirement savings is because they’re looking to consolidate their pension holdings.The average person has 9 jobs in their lifetime (LV=) so — especially with the introduction of auto-enrolment — it’s now very easy to build up multiple pension pots if you have multiple jobs over your career.

Consolidating your pensions might be done as part of a pension review. It involves reducing the number of pension funds you have into fewer, or even a single, holding.

This may have a number of potential benefits:

• A single pot can reduce fees and charges
• It can provide clear oversight of retirement savings
• It may make it easier to manage your investment risk and tax planning.

While it could make sense to consolidate pensions into fewer pots, you need to think carefully before you do so to make sure it’s the best financial decision for you.

Beware of any exit charges that may shift the balance between whether pension consolidation is a good idea or not.

Jonathan Cooper
Senior Paraplanner at Drewberry

When Should I Transfer My Pensions?

There are many situations where it may make sense to engage in a pension switch or a pension transfer. Of course, everyone’s circumstances are different, which is why it generally pays to speak to an expert before undertaking any such action.

Merging Workplace Pensions When You Change Jobs

With an occupational or workplace defined contribution pension, although the investment pot is under your name it’s tied to your employer. If you leave you may be able to transfer your pension, either to a personal pension arrangement or to your new employer’s pension scheme. However, your new employer isn’t obliged to allow a transfer in from your old scheme.

There may also be exit fee, charges and other costs imposed by trying to move your pension from previous jobs, so examine it carefully to ensure it’s financially worthwhile to do so, especially if the pot is small because you only worked for the employer for a short period of time. Smaller pots are more likely to get eaten up by transfer fees and charges.

If you don’t transfer your pension from an old job, it doesn’t vanish. Even if you can’t pay into it any more, it stays invested and you’ll be able to access it when you reach the scheme’s pension age.

You may, however, still want to compare old pensions with new ones to see if you can reduce ongoing fees and charges.

Casey Goodwin
Paraplanner at Drewberry

Moving Pensions for Access to More Funds

If you’re a keen investor and want access to more funds than your pension currently offers, it may make sense to move your pension elsewhere. Typically, if you have a personal pension arrangement, a self-invested personal pension (SIPP) will offer the most freedom in terms of the areas and funds you can invest in than a stakeholder pension.

However, SIPPs typically have higher ongoing fees and charges than other pension arrangements. This is particularly the case when compared to a stakeholder pension, where the government has a strict cap on the fees such platforms can charge. Also, there’ll typically be charges associated with the transfer, such as exit charges on the old plan, initial charges on the new plan and the cost of any advice you take on the transfer.

Transferring Your Pension if Your Scheme Closes

Defined benefit pension schemes can close, either to new members or entirely. This is usually as a result of funding difficulties. If your company has gone into administration and the scheme has transferred to the Pension Protection Fund, then you won’t be able to transfer out. If, however, the scheme has simply closed then it may be possible to make a transfer.

Pension funds in financial difficulties may offer an enhanced transfer value for you to leave the scheme as an incentive, as you transferring out reduces the scheme’s long-term liabilities. However, as with all defined benefit pension transfers, you’ll have to carefully consider your options to decide whether it’s right for you, even with an enhanced offer on the table. For most people, this won’t be the right course of action.

Which Pensions Can You Transfer?

• Most defined contribution or money purchase schemes
  If you have a defined contribution pension worth more than £30,000 and it has a guaranteed annuity rate, you’ll need to seek pension advice before transferring
• Most private sector defined benefit pension schemes
  If your final salary pension is worth more than £30,000 you’ll need to receive regulated financial advice before transferring and it’s also important to consider very carefully whether this is in your best interest, as a defined benefit pension transfer isn’t right for most people
• Funded public sector final salary schemes (e.g. the local government pension scheme)
  However, again it’s important to make sure this is the right decision for you before transferring as it won’t be right for the majority of people.

Which Pensions Can’t You Transfer?

You can’t transfer out of unfunded public sector schemes, such as the teachers’ pension fund, the NHS or the armed forces pension.

Final Salary Pension Transfers

With a final salary pension, there’s no pot of cash with your name on it. That means any potential transfer value you receive from a defined benefit scheme is meant to be equivalent to the sum of money you’d need to buy the same income you’d get from your company on the open market, assuming the funds are invested until the scheme’s normal retirement date.

Many companies are offering high pension transfer values in the current environment thanks to funding pressures. This is designed as an incentive to transfer. Another reason for today’s high transfer values is the difficulties with replicating a pension income with an annuity in a low-rate economic climate.

Why Transfer My Final Salary Pension?

• Take advantage of the new pension freedoms
  Access your defined contribution pension from 55 compared to having to wait until you’re scheme’s normal retirement age to take a final salary scheme
• Use the flexibility of income drawdown to take income and lump sums as and when you need them
  This is compared to the regular, unchangeable payments you’d receive from a final salary scheme
• Pass your new drawdown pension pot to loved ones
  Aside from a reduced widow’s pension, there’s not usually anything left behind when the original pensioner dies, whereas with a defined contribution scheme there are favourable inheritance tax rules for passing down pensions
• You’re in poor health
  If your life expectancy is short, you won’t receive income from your final salary scheme for very long despite potentially having paid into it for years. With a transfer, you’ll receive a lump sum you can pass down to loved ones if you wish
• Manage your own investments
  Invest how you want and in a portfolio designed specifically to meet your retirement needs
• Avoid doubts about the health of your employer
  Final salary schemes have been at the heart of some of the most noteworthy corporate administrations in the UK in recent years, including the pension scheme ‘black hole’ which contributed to the demise of retailer BHS. If your employer collapses, your scheme will likely end up in the hands of the Pension Protection Fund.

Risks of a Final Salary Pension Transfer

The biggest risk of leaving your defined benefit pension is that you’re giving up a guaranteed income for the rest of your life. If you choose to leave your final salary pension for drawdown, your retirement income is no longer guaranteed and could therefore run out. The risk here is that you’ll find yourself worse off in retirement than if you’d stayed within the scheme.

Other risks involved include:

• You’ll need to take on all the investment risk yourself
• The value of your pension fund could go down as well as up in line with market performance
• You’ll lose any rights you had under your scheme, such as the widow’s pension for a surviving spouse
• No opportunity to change your mind
• Increased fees and charges.

Defined Contribution Pension Transfers

The considerations and analysis involved with transferring a defined contribution pension are typically much simpler than for a defined benefit pension transfer. You can transfer of switch these as you see fit throughout your working life.

If you want to transfer your money purchase pension, you need to ask your provider for a transfer value. A defined contribution transfer value is usually simply the amount of cash you have in the pension, less any exit fees and charges you may have to pay for moving your pension.

You may be able to transfer your pension to another workplace scheme or to another pension provider or platform. This could be to consolidate your pension holdings or achieve lower fees and charges. You might also transfer a defined contribution pension because you’re looking to access more funds.

Risks of Transferring a Defined Contribution Pension

• You might have to pay an exit charge when you make the transfer
• Your new pension might charge higher fees than your last one
• You might lose the right to take more than 25% of your pension upfront as a tax-free cash lump sum (available to certain pensions which fall under pre-2006 rules)
• You might lose guarantees such as a guaranteed annuity rate, guaranteed maturity value, guaranteed investment returns etc.
• You might lose the right to take a pension at an age younger than 55
• If you have any benefits associated with your pension, such as Life Insurance, you may lose this
• There’s very little opportunity to change your mind.

Make Sure You Avoid Pension Transfer Scams

Since the introduction of the pension freedoms, there’s been a higher incidence of pension transfer fraud as criminals use awareness of the new legislation to effectively con people out of their hard-earned savings.

A pension scam often starts with an unsolicited text message or cold call, offering you the chance to transfer, unlock or access your pension. It may even promise you can do so free of tax. If you receive any such communication from a company you’ve never heard of or have never had any dealings with, the best thing to do is to ignore it.

You can contact the Pensions Advisory Service if you’re being harassed by pension cold callers pressuring you into transferring your pension.

Scams come in many forms, but phrases such as ‘pension liberation’, ‘pension loan’, ‘loophole’, ‘tax-free’ or ‘time-limited’ should set off warning bells, especially from a company you don’t know anything about.

To protect yourself from pension scams, steps you can take include:

• Checking the firm’s contact details, such as telephone number and address, and see if these seem genuine
• You can also check these details on the Financial Services Register, a database of regulated and approved financial services practitioners held by the FCA
• Make sure you can call the company back later at a time that suits you
• Know that you can’t unlock your pension before the age of 55 (unless you’re severely / terminally ill), and doing so will incur a hefty tax charge
• Don’t be rushed into making decisions
• Be extra cautious about ‘overseas’, ‘ethical’ or ‘new opportunity’ investments
• And, above all, if it sounds too good to be true it probably is.

Your Financial Plan: Build A Better Future

A good financial plan can help you make the right decisions when it comes to your finances. Make the right decisions today to build a more prosperous future.

Good financial planning with clear goals can increase your retirement income by as much as 53%. Old Mutual Redefining Retirement Survey

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