How to transfer your pension – what you need to know
If you have a pension – whether it’s through your employer or a personal pension – then you are able to transfer it to a new provider.
Transferring a pension can be quite a complex process, and is certainly not a decision you should take lightly. You should therefore make sure you seek the advice of a professional financial adviser before doing anything.
In this guide we will take you through the basics of pension transfers so you can approach the subject with more confidence.
Why you might consider moving your pension
There are various reasons why an individual might want to transfer their pension, such as:
- Consolidating a number of different pension contracts into one pension
- Your existing pension has a limited investment choice
- Reduce the costs of the pension
- Your current pension plan is expiring
- Moving abroad and want to transfer to a pension in the new country
- Looking for more flexible options
Pension transfer incentives
Pension plans that are provided by an employer can be expensive to run, and final salary schemes can often leave the employer with a long term financial commitment. This has led to a lot of employers offering their employees incentives to transfer their pensions away from the company or to accept certain amendments to their pension benefits.
Common incentives include:
- An increased transfer value (higher CETV – Cash Equivalent Transfer Value)
- Benefits such as life cover for a reduced pension
- Removal of index linking in return for an increased pension
All employers are subject to a code of conduct when it comes to offering pension transfer incentives to their employees, so you should not feel pressurised or coerced into making a decision. If you are being offered an incentive such as those above then your employer is also duty-bound to provide you with free and independent financial advice.
When you should not think about transferring your pension
There are a number of instances when you should not consider transferring your pension which include:
- if you will lose any benefits such as index linking, life cover or a dependents’ pension
- if your current pension scheme provides a guaranteed annuity option which may be higher than annuity rates available on the open market
- where your current pension scheme applies a significant charge to transfer
- if the investment options available in the new scheme are limited or risky and you will require ongoing financial advice which could be costly
- you are close to retirement and changing to a different pension provider may be detrimental in the short term
How does a pension transfer work?
The whole process of transferring a pension begins when you get in touch with your pension provider and request a transfer value from them.
If you want to transfer from a final salary pension (i.e. a defined benefit scheme) then the transfer will be what is known as a CETV, or cash equivalent transfer value. This is when the benefits you have accrued as represented as a cash value. The CETV is set at a guaranteed amount for three months and you should be provided with the official expiry date on the transfer document you receive.
The CETV is worked out as an estimate of the amount that will be required to be invested in order to maintain your current pension entitlement with the new scheme.
The process is quite similar if you are transferring from a defined contribution scheme, which is typically a pension that is invested in stocks and shares. In this case you need to request the transfer value from your pension administrator, and the actual value of the transfer will be based on the value of the pension at the point in which they are transferred. As they are invested in the market this could be higher or lower than the initial pension transfer value you were given.
Does it cost to transfer a pension?
As the process of transferring a pension can be pretty complex, there are a strict set of rules in place designed to protect you. Therefore it is important that you should seek professional and independent financial advice before beginning the process.
Depending on the type of pension you have you may be charged fees to transfer it, which could amount to thousands of pounds for those with large pension funds. It is critical that you check what the fees are and make sure they don’t detract from the benefits you may be getting from moving your pension.
Different types of pension transfers
As we have already touched upon earlier, there are certain differences in the process of transferring pensions depending on what type of pension you have and what type you want to move to…
Transfer to a SIPP
SIPP stands of Self Invested Personal Pension, and is a common option when people are looking to transfer a pension. You can move a personal pension and an occupational pension to a SIPP, as well as transfer an existing SIPP to a new provider.
A SIPP is a popular choice as it can offer a flexible pension option with a variety of investment choices, and can all be managed and monitored online. This makes it more simple to manage your pension so is a good option for those who want to have more input and control over their investments.
Transfer from an occupational pension
If you have an occupational pension then you can transfer that to a SIPP, a personal pension or potentially the occupational pension scheme of a new employer – providing their scheme allows for transfers.
It’s worth noting though that transferring your company pension to a personal one or a SIPP can lead to you losing some of the benefits of your old one e.g. life insurance, spouse/dependant benefits etc…