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 personal pension, stakeholder pension, or self-invested personal pension (SIPP), we’ve set out seven 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 start.
If the scheme you’re thinking about transferring out of is a workplace defined benefit pension scheme and the value of your pension benefit is more than £30,000 you’ll have to take professional advice from a regulated financial adviser.
Seven key pension questions
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 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 clarify any issues you’re unsure about.
2. Would a stakeholder pension meet my needs and objectives?
Stakeholder pensions can be cheaper than other personal pensions and have a cap on the annual management charge they can make, so if you have an adviser, make sure they discuss this option with you.
If your adviser doesn’t think a stakeholder pension would be suitable for you make sure you understand why.
Most stakeholder pensions now provide access to a wide range of funds.
So even if you’re looking for some flexibility in your investment choices there is likely to be a stakeholder pension to suit you.
3. 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. There is no point 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 would 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 consult a regulated financial adviser who will go through the pros and cons with you.
4. 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 pension for your partner after you die, or a Guaranteed Annuity Rate (GAR) option.
A GAR option is where the pension provider will pay your pension at a particular rate, which might be much higher than the rates available in the annuity market when you retire.
You don’t have to use your pension to buy an annuity, but buying an annuity is still an option so it’s important to understand the pros and cons of transferring where you have a Guaranteed Annuity Rate.
If your benefits are worth more than £30,000 and you have a Guaranteed Annuity Rate you’ll have to have the transfer 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.
5. Are there any charges if I transfer?
Some pensions might apply a charge when you transfer out.
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.
6. 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 your can ask for 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 – remember, investments can go up or down.
If you use an adviser they will need to be clear about what fee they will charge, whether it’s for one-off or ongoing advice – find out more below.
7. 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 investment 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 benefits are worth £30,000 or more, 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 you if you follow the recommendation they make and it turns out not to be the best course of action, 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 are absolutely sure, you should seek professional financial advice from a regulated financial adviser.
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.
Financial advice – charges
You will have to pay your adviser a fee for any one-off or ongoing advice service and they must agree this with you upfront.
New rules introduced at the start of 2013 mean advisers can no longer take commission from a pension product they recommend to you – and that includes if they transfer a pension for you from one provider to another.
Their charges are for the advice they give you. This can be paid directly by you, or deducted from your pension plan.