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Transferring a personal or workplace pension is an important and often irreversible decision, which can dramatically affect your lifestyle in retirement. Therefore, it is especially important to seek independent financial advice beforehand, to ensure you make the best decision for you based on the most accurate and relevant information.
Here are just some of the reasons why you might think about transferring your pension:
- You believe you might be able to find a cheaper scheme elsewhere.
- You want to unlock certain benefits which are unavailable under your current scheme (e.g. the ability to pass on your pension as an inheritance to your loved ones).
- You would like more control over your pension investments, rather than having your pension scheme decide for you.
- You want to bring multiple pensions together into one pot, for easier management.
Different Types of Pension Transfer
The subject of pension transfers can be a complex one since there are many different types of pension. The process of transferring from one type to another will, therefore, vary. Here are two common types of pension transfer:
- Moving a final salary pension (or “defined benefit” pension) to a defined contribution pension. The former type of pension involves you receiving a guaranteed lifetime income from your employer. The latter involves building up a pot of money which can then be used to generate an income during retirement (e.g. by buying an annuity).
- Moving money from one type of defined contribution scheme (e.g. a workplace pension) to another one (e.g. a personal pension); for instance, to access more benefits, lower investment management fees or better investment performance.
Risks to Consider when Transferring
Moving your pension can unlock some fantastic benefits and opportunities which, on balance, makes it the right choice for many people. However, for many other people it is better to stay with your existing scheme, which is often the case for those with decent final salary pensions. There are a number of transfer risks which we recommend you discuss with your financial adviser ahead of time, including:
- Transfer of investment risk. For those on a final salary or defined benefit pension, it is the responsibility of your employer to make up any shortfall in your pension’s investment performance. If you transfer to a personal pension, however, then you become responsible for shouldering the investment risk.
- Exit penalties. Many pension schemes would be unhappy to see their members leave, and so sometimes place a punitive charge on those who decide to do so. In some cases the benefits of transferring can still outweigh the cost of exit penalty, but in other cases the reverse is true.
- Buyer’s remorse. Individuals are entitled to a 30-day “cool-off” period when they transfer their pension, which can give you some time to change your mind. However, not all pension schemes will take your money back once you have left. So, make sure you confirm (in writing) that they would be willing to do so. Bear in mind, however, that once the “cool-off” period is over, you usually cannot transfer back to your old scheme. For those who transfer out of final salary schemes, moreover, this is near-impossible.
- Losing Guaranteed Annuity Rates (GARs). A GAR can be a particularly valuable benefit which your current pension scheme might offer. This could mean that you get a better deal when buying an annuity when you retire. You might lose this benefit, however, if you transfer to another scheme.
- Transfer value reduction. In some sad cases, a company’s defined benefit scheme might not have enough money to fund the pensions. If you decide to transfer out of this scheme into a defined contribution pension, then the transfer value you are offered may, therefore, be lower than what you expected.
- Loss of employer contributions. If you are currently a member of your workplace defined contribution pension, then you should get contributions from your employer. If you move out of this scheme (e.g. into a personal pension) then you risk losing this extra money.
Overseas Pension Transfers
The above content mostly concerns UK residents who are possibly thinking about transferring from one UK pension scheme to another. For those who are considering retirement abroad, however, there are additional areas of pension planning which need to be taken into account.
It’s especially important to seek independent financial advice if this might be relevant to you. After all, the last thing you want is to move overseas and find yourself unable to access your pension benefits, or with a poorer deal than you anticipated.
Broadly speaking, would-be British expats have two options. The first is to leave your pensions in UK pension plans. When you reach retirement age you can simply receive your pension income from your UK accounts, possibly then transferring it overseas to convert into the local currency. Alternatively, you could speak to your financial adviser about transferring your pension(s) into an approved arrangement such as a Qualified Overseas Pension Scheme (QROPS), possibly in your new country of residence.
Final Thoughts
Many nerves accompany people’s questions about possible pension transfers. After all, these are you life savings which are meant to carry you through your later years. You want to be sure that you are making the right decision and that you will not look back with any regrets.
This is why it really does pay to seek independent financial advice. Although it comes with a cost, this is typically more than paid for in the long run, especially in the form of greater risk-mitigation and peace of mind in retirement.
If you would like to discuss your financial plan with a member of our team, then get in touch today to arrange a free consultation: 020 8366 4400 or enquiries@cedarhfs.co.uk.