Many more savers are taking advantage of their freedom to transfer their pensions and so if you’ve got a pension pot, you might be wondering if it’s in the right place or whether you could get better performance and value with another provider. Or maybe your employer has sent you a transfer value for your final salary pension and you want to know if it’s a good deal. This article explains what you need to consider when deciding whether to transfer a pension or stay put.
Should I transfer my pension?
First, a quick reminder of the difference between the two main types of scheme. A defined contribution (DC) pension is one in which you pay in contributions (although your employer will also pay in if it’s a workplace DC pension) and the pension benefits are based on how much is paid in.
A defined benefit (DB) pension (often called a final salary pension) is a scheme offered by an employer in which the guaranteed pension benefits are based on your salary and how long you have worked for the company. They tend to be such generous schemes that many employers can no longer afford to run them and few are accepting new members.
If you are in a defined contribution scheme, there are a few key reasons why you might want to transfer elsewhere:
- Price – you could find more competitive charges with another provider, preventing the value of your pot being eroded by high fees.
- Investment choice – you might find a wider range of underlying investments to choose from with another provider, offering better performance.
- To consolidate all your pension pots in one place – if you’ve got lots of small pension pots floating around from previous jobs, for example, consolidating them can give you more control, make administration easier and reduce fees as you often pay less the larger your pot.
- If you start working for a new employer – you might want to move existing pension savings into a new workplace scheme.
- If you move overseas – maybe you want a local provider to run your pension.
When it comes to defined benefit schemes, things are more complicated and transfers have more potential pitfalls. In fact, the financial regulator says financial advisers should always start from the assumption that a pension should not be transferred. This is because it has seen a “high proportion of unsuitable advice” in this area and wants to explore further how consumers pay for transfer advice. In an updated policy statement published in March 2021, the FCA said: “It remains our view that it is in the best interest of most consumers to stay in their DB pension. Where an individual seeks advice to transfer, we expect firms to give advice that is suitable and appropriate for their needs and situation.”
However, pension freedoms mean that transferring to a DC scheme could give you more flexibility, especially when it comes to your options to access your cash through drawdown when you reach 55 and more control over who inherits your pension after you die. If you have a life-limiting illness or another source of retirement income other than your DB pension you might also consider a transfer.
Read our article Should I transfer my final salary pension? to learn more about transferring final salary pension schemes.
Risks to consider before deciding to transfer your pension
Before you make a decision to transfer your DC pension, read the small print relating to your existing scheme and the one you want to move to. You need to make sure the benefits of a transfer outweigh the potential disadvantages. These could include exit penalties, transfer fees, forfeited bonuses, or the loss of valuable benefits such as life cover or guaranteed annuity rates (GARs). There may be other costs associated with a transfer, such as fees for ongoing financial advice, so take these into consideration too.
If you have a stakeholder pension, you benefit from capped charges which would no longer apply if you moved to a different type of scheme. However, usually these schemes will not charge you a penalty for transferring out, or for transferring in from another UK scheme.
Some older pension schemes give you the right to take more than 25% of your pension as a tax-free lump sum (called a protected tax-free sum), or to take your money out at a certain age (called a protected pension age) so you would need to check if transferring would mean you lose these benefits.
For a DB or final salary pension, you risk losing many years of guaranteed benefits if you transfer out so it’s crucial to take proper advice, even if the cash transfer value looks like a temptingly large lump sum.
When shouldn't you transfer a pension?
We’ve covered some situations in which it might make sense to transfer a pension, mainly if you move job or country, or want to improve returns or cut fees. Generally speaking, you’ll only want to do these things if you will not be hit with large exit fees and are not already close to retirement, as you may not have enough time to recoup any costs through future investment performance. As we have already seen, most people probably should not transfer a defined benefit (final salary) pension. This is because you would lose a guaranteed income (which may even rise with inflation), plus any death benefits such as a spouse’s pension and you would be at the mercy of the financial markets if you cashed out your pot to reinvest it. If you are considering it, there are calculators you can use to get an idea of what your pension would be worth, this figure is called the cash equivalent transfer value (CETV).
Bear in mind not everyone has the option to transfer their workplace pension. Unfunded public sector schemes such as those for the NHS, the armed forces, teachers and the police do not allow transfers and you cannot normally transfer a final salary scheme once it has started payments.
Deciding where to transfer your pension to?
Where you transfer will really depend on what you’re trying to achieve. For example, if your aim is to take control of your own pension and choose your own underlying investments, you might want to transfer into a Self-Invested Personal Pension (SIPP) that you can manage yourself. To learn more about this, read our guide Are SIPPs worth it?. If your goal is to simplify your financial life by consolidating multiple pension plans, you could use a service that locates and consolidates your forgotten pension savings. One such service is PensionBee, read our detailed PensionBee review. Or if you’re moving to a new job, you might want to transfer existing pension savings into your new employer’s scheme, if it allows this.
How long does it take to transfer a pension?
See also: ‘how long is a piece of string?’. PensionBee conducted some research looking at pension transfer times and found the slowest took 52 days. Bestinvest says electronic transfers into its SIPP take 15 working days, but it notes some providers still require manual transfers which can take up to 12 weeks. AJ Bell says SIPP transfers in take 4-6 weeks for stocks and 6-8 weeks for funds. But long delays have been reported for final salary scheme transfers, so be prepared that things could take longer than you expect.
How much does it cost to transfer a pension?
There’s no easy answer to this question either as it all depends on what type of scheme you are in and its rules, as well as the size of your pension and whether you take financial advice. It’s important to note that many adviser firms will not take on new clients who just want to unlock the value in their pensions, usually they will insist on offering pension transfer advice as part of a package of wider financial planning. Those that do may charge different rates to new and existing clients. Pension transfer fees may be charged hourly, as a fixed fee, or as a percentage of the pension pot. According to Unbiased, you could pay £900 for advice on transferring a £30,000 pension or £2,000 for a £100,000 pot. You may also have to pay early exit fees to your existing pension provider, and these can run into the thousands.
PensionBee’s research also looked at exit charges, reporting some shockingly high percentage fees, although many were on small pots which the pension providers said made the charges appear misleading.
Should I seek financial advice?
If you are thinking about transferring from a workplace defined benefit pension scheme and your pot is worth more than £30,000, legally you have to take professional advice from an FCA regulated financial adviser. But even if you’re in a different type of scheme it may still be worth paying for advice to make sure you are doing the right thing for your precious retirement fund. If your financial affairs are fairly simple and you know what you’re doing, you could save a lot of cash by taking a DIY approach. However, in more complicated situations involving larger pensions, the right advice can pay for itself in terms of improved returns from your pension fund and the avoidance of expensive mistakes. If you don't already have a financial adviser here is how to find a good financial adviser that you can trust.
How to avoid pension scams
Since consumers were given more autonomy over their pensions with the 2015 launch of pension freedoms, there has unfortunately been a concurrent rise in scams designed to swindle them out of their savings. Victims of pension scams lose on average £91,000, according to the FCA and the Pensions Regulator. There are a few tell-tale signs of a scam: being cold-called, not being able to call the company back in your own time, high-pressure sales tactics to get you to make decisions quickly, promises to let you access your cash before the age of 55, or asking you to withdraw a lump sum for them to invest in some exciting new high-return opportunity. They may claim to be affiliated with the government, the regulator or Pension Wise, but of course these organisations will never contact you asking you to move your pension. Ultimately you just need to use common sense: if something sounds too good to be true, it probably is.