Pensions are complicated products, and if you are considering transferring a pension, then there are a lot of things that you should consider before going ahead. Transferring your pension is a big financial decision that can affect your financial stability for the rest of your life and impact the amount of money you have after you retire.
Before you decide if transferring your pension is right for you, you should fully understand all your options and what they will mean to your pension pot in the future. This guide covers everything you need to know about pension transfers, including what they are, the reasons why you might consider one, and the things you should check before you decide.
What is a pension transfer?
A pension transfer is when you decide to move your accrued pension from one scheme to another. The FCA defines a pension transfer as the transfer of benefits from any occupational or safeguarded pension scheme, to any other defined contribution pension scheme, regardless of whether the retirement benefits will be taken immediately or not.
Transferring your pension can be worthwhile if you have various pension pots and want to amalgamate them into one place, or if you want to have more investment choice than you get from your current provider.
Transferring pensions can be very complicated, and it is often worth seeking independent financial advice, especially if your pension pot is fairly large.
Why should you transfer your pension?
There are a variety of reasons as to why you might want to transfer your pension. You might decide to transfer your pension so you can have more control over your finances, because you want simpler retirement planning, or because another pension provider offers better value for your money.
It does not always make financial sense to transfer your pension, especially if you currently have a pension with various benefits or guarantees, so it is vital that you properly investigate before making a decision.
Some of the most common reasons for transferring a pension include:
- Having multiple pension pots from various different jobs and wanting to consolidate them into just one place.
- Finding a pension scheme that offers better value than your current one.
- Your current pension scheme being closed down for any reason.
- Having a relationship breakdown such as a divorce, whereby the funds need to be reallocated to a different scheme.
- Changing jobs and wanting to move your pension pot to your new employer’s pension scheme provider.
- Relocating overseas and wanting to move your pension to a scheme in your new country.
Every situation is different, and everyone will have a different reason for wanting to transfer their pension. Each pension scheme type will have different options for transferring, so it is vital that you properly research your type of pension scheme.
What to consider before transferring your pension?
When you choose to transfer your pension, there are a few things you should be aware of before deciding if it is the right option for you. There are various risks involved with transferring pensions, and these include:
- Exit penalties: Your existing pension policy may have an exit policy that you will need to take into consideration. For some providers, these fees can be thousands of pounds, so it is important to check.
- Transfer of risk: If you want to transfer from a final salary scheme pension into a personal pension, then your investment risks will be transferred from your employer to you. If there are charges for the scheme, then these may also be transferred to you.
- Loss of GARs: Guaranteed Annuity Rates (GARs) may be included as a valuable benefit in your existing pension. If you switch provider, then it could mean a higher annuity rate when you come to retire.
- Reduced transfer value: If you have a defined benefit pension and it is under-funded, then the transfer value you are offered could be reduced.
- Ongoing financial advice: If you are considering the costs of transferring pensions, then you should also consider the cost of ongoing financial advice as you may need regular reviews of your investments.
- Lost bonuses: Some pension providers will offer bonuses to investors that stay with them and make regular contributions. If you transfer to a new provider, they may not be able to match these same benefits.
- Tax-free lump sums: If you transfer your pension then you could lose any right you had to take the tax-free lump sum of over 25%, under the pre-2006 rules.
Most pension transfers come with a 30 days cancellation period. However, you should ensure that your old pension scheme would take your money back, as many will not accept this.