Transferring defined contribution pensions

Pension transfers can be complicated and there are a lot of things to think about before going ahead. You need to consider your own situation carefully and, in some cases, take regulated financial advice.

Is transferring a pension a good idea?

If you’re thinking about transferring a current pension into a new workplace pension or personal pension, stakeholder pension, or self-invested personal pension (SIPP), we’ve set out some key questions for you to consider.

But remember, whether a transfer is suitable or not will very much depend on your individual circumstances and objectives.

This information can’t cover everything you’ll need to think about, but it can help you to make a start.

This guide is about transferring out of defined contribution (DC) pension scheme. A DC pension scheme (also known as a money-purchase pension scheme) is the type of scheme where you build up a pension pot of savings that you can use in various ways to provide an income when you decide to stop working. The amount you will have in your pension pot will depend on how much you (and your employer if you’re employed) pay in, the charges you pay and how well the investments in your pension pot perform.

However, if the scheme you’re thinking about transferring out of is a workplace defined benefit pension scheme (also known as a ‘final salary’ or ‘career average’ scheme) and the transfer value of your pension is more than £30,000, you’ll have to take professional advice from a regulated financial adviser.

Key questions to ask before you transfer

1. Will the new pension be more expensive than my existing one?

If the new pension costs more, make sure you’re satisfied that the additional costs are for good reason.

For example, if the new pension offers you access to more investment funds than your current pension(s), ask yourself whether you need them.

You wouldn’t take out a more expensive mortgage or insurance policy without good reason, so why do it with your pension?

You’ll get information about the costs of the new pension from the pension provider or your adviser.

You need to read all the documents you’re given so you can question any issues you’re unsure about.

2. Is it a good idea to transfer all my pension pots into a single new one?

There is no right or wrong answer to this question – it depends on why you want to do this.

Some people just prefer having all their pension savings in one place to make it easier to keep track of them and this is a valid reason for consolidating.

However, costs are very important. Think carefully about transferring from a low charging scheme to a higher charging one just to keep things simple.

That said, if you are coming up to retirement and your current scheme doesn’t offer the retirement income option you want, then consolidating all your pension pots into one scheme that has the flexibility you need could be a good idea.

Everyone is different. That’s why, unless you are very sure you understand the implications of transferring, it’s a good idea to speak to one of our impartial pension experts for free who can go through the pros and cons with you. See all the ways you can contact us at the bottom of the page.

3. Will I lose any benefits?

It’s possible that your current pension has valuable benefits that you’d lose if you were to transfer out of it, such as additional death benefits, a higher tax-free lump sum, a pension for your partner after you die, or a Guaranteed Annuity Rate (GAR) option.

A GAR option is where the pension provider will pay you a guaranteed income for life (also known as an annuity) at a particular rate, which might be much higher than the rates available in the general annuity market when you retire.

Even if you hadn’t considered buying a guaranteed income with your pension pot, you might change your mind if you know you’re entitled to a high guaranteed rate, so it’s important to understand the pros and cons of transferring where you have a Guaranteed Annuity Rate.

If your transfer value is more than £30,000 and you have a Guaranteed Annuity Rate or other protected benefits, the transfer will have to be signed off by a regulated financial adviser before your pension scheme will release the money.

This rule is there to protect you and make sure you’re fully aware of what you’re giving up.

4. Are there any charges if I transfer?

Some schemes might apply a charge when you transfer out. Also take into account any set-up charges and ongoing charges on the new pension plan.

These can be significant – sometimes several thousand pounds (depending on the size of your fund) so it’s important to check if one applies in your case.

5. Will the investments in the new pension be right for the amount of risk I’m prepared to take?

You might want to decide for yourself how to invest your money, or you can ask a financial adviser to make recommendations for you.

Either way it’s important the investments chosen are appropriate for the amount of risk you’re prepared to take with your money – and also when you plan to access your money. For example, if you plan to take out your money in five years’ time to buy an income, your investment strategy may be different from someone who wants to leave the pension pot invested and draw an income from it during their retirement.

6. Will I need ongoing advice?

Whether or not you decide to transfer your funds, it’s important to review your pension savings regularly.

For example, it’s also possible that the amount of risk you’re prepared to take could change over time if your financial situation changes, or as you get nearer to retirement.

If you are unsure of how to do this, it is a good idea to speak to a regulated financial adviser who can check that you are invested in funds that suit your circumstances and that are performing well for you.

If you take regulated financial advice when you transfer (if you do transfer), then your adviser will explain about any ongoing service that they offer and how much this costs.

Ask yourself if you have enough knowledge and experience of investing to make decisions that will affect how much income you have in retirement, without the need for an adviser.

Do you need financial advice?

If you have what’s called ‘safeguarded benefits’ – in particular if you’re in a defined benefit pension scheme or have a guaranteed annuity rate – and your transfer value is more than £30,000, you’ll have to take regulated financial advice before you can transfer.

This rule is there for your protection to make sure you are aware of all the pros and cons of transferring.

The financial adviser takes liability for the advice so if you follow the recommendation they make and this turns out to be inappropriate for you, you’re covered by law.

But even if you don’t have to take professional advice, it can be difficult to make the right decision on your own, even when you have all the information you need.

So, unless you’re absolutely sure, you should seek professional financial advice from a regulated financial adviser. But speak to one of our impartial pension experts for free before you do. All the ways to contact us are at the bottom of the page.

You can find a regulated adviser on the Retirement Adviser Directory.

If you decide to get advice, make sure your adviser gives you full answers to each of the questions raised above.

It might be helpful to print this guide out and take it with you to any meetings with an adviser and use it as a checklist to refer to when reading any of their written recommendations.

If you decide not to get advice, make sure you fully understand the risks and benefits of transferring your pension.

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