Why transfer your pension?
There are a number of reasons why you may want to transfer your pension:
- You’re changing jobs and you want to move it to a new employer’s scheme
Your scheme administrator should inform you of your choices when you leave
- You want to take advantage of lower fees
Often, providers will charge a lower fee for a larger fund, so you may be looking to consolidate your pots into one
- Your current scheme is about to close or be wound up
It's not unusual for this to happen, especially if a company goes bust
- You’re consolidating your old pensions into your new pensions accounts after examining your personal finances
- You're moving overseas
It’s important to seek expert pension advice
to make sure transferring your pension makes financial sense and that you don’t lose out on important benefits.
Transferring from a defined benefit (final salary) pension
A defined benefit scheme, also known as a final salary scheme, pays out a guaranteed income for life once you retire. Your income is calculated based on your final salary and the length of your scheme membership.
If you decide you want to transfer from a defined benefit scheme, then your scheme administrator will provide you with a ‘cash equivalent transfer value’ – the cash value of the benefits you have built up – which you can then move to another pension arrangement. You’ll have to fill out a form requesting the transfer and provide your administrator with the details of the new arrangement.
Defined benefit arrangements are regarded as gold-plated pension plans because of the guaranteed income security they provide and therefore, for the vast majority of people, it will be the right decision to stay within the scheme. In defined contribution schemes, your income is not predictable and will depend on investment performance and annuity rates when you retire.
However, the flexibility offered by defined contribution schemes, such as the ability to take money out from age 55, can suit some savers.
‘If someone has a few different defined benefit pensions and some provide small amounts of income, a high transfer value that can be put into a defined contribution pension scheme might be more valuable to them,’ Ros Altmann says.
‘If they have other secure pension income, then having some money in a defined contribution scheme can grow tax free and stay there for them until they are much older, perhaps even to help fund care,’ she adds.
You should take professional financial advice if you are considering giving up any valuable benefits and also check the scheme you want to move to accepts such a transfer, as not all schemes do. The new scheme’s administrator can give you this information.
Transferring from a defined contribution scheme
If you want to transfer from a defined contribution plan, you should ask your scheme for the transfer value. Before you go ahead there are some key things you should consider:
- Choice of investments
You want to make sure the new scheme provides the right level of choice to match your attitude to risk
Some schemes apply a charge when you transfer out
- Ongoing advice
Some plans need to be reviewed regularly
- Loss of benefits
By transferring out you may lose certain benefits under the old plan
- The quality of administration in the new scheme
‘Transferring a pension is not always simple. Make sure you aren’t giving up guarantees in your existing scheme. Some schemes include life insurance
, others include guaranteed benefits,’ says Ros.
‘Also, you may need to see what default and investment options are being offered to make sure they are suitable for your needs,’ she adds.
You should discuss these considerations with a pension adviser
before going ahead with any transfer.
If you move overseas, you may want to transfer your pension to a scheme in your new country, or to a new employer.
You can leave your pension pot in the UK and draw money from abroad, or you can transfer the entire pot abroad. You can mix your options as well – where you might leave one pot in the UK and move another overseas.
As always, there are benefits and negatives to each decision:
- If you leave the pension pot in the UK, your choices, such as how you withdraw the benefits, will remain the same
- Taking your pension overseas can cause tax problems, such as being taxed on your tax-free lump sum if you haven’t already taken it
- If you do transfer overseas, there may be a fee for having the pension paid into an overseas account.
- If you move overseas, you can stop paying into the pension and start taking money out from age 55. You are able to continue paying into it, but you may not benefit from the tax relief.
You can only transfer if your overseas scheme is recognized by the HMRC as a ‘qualifying recognized overseas pension scheme’ (QROPS). A full list of QROPS can be found on the government’s website.
Top tip: If you leave your pension in the UK, note that it will be paid in pounds, so beware of fluctuations in exchange rates. If rates don’t go in the right direction, then you could see your income drop.
There are many positives to transferring your pension, and with the right preparation and advice, you can navigate any potential pitfalls as well.