Pension Transfers

Pension Transfers – is it right for me?

If you’re thinking about pension transfers, you need to know that if the value of your pension pot is more than £30,000 you need to be very careful and get professional advice.

Pensions fall into two main types – defined contribution (also known as ‘money purchase’ or ‘DC’) pension schemes and defined benefits (also known as ‘final salary’ or ‘DB’) pension schemes.

Pension transfers (sometimes called switching) benefits from one DC to another DC pension is reasonably straightforward because you are moving one pot of money from one pension provider to another offering the same type of scheme. However, there are three main things you must consider:

• The charges (costs) – are the charges higher or lower than the scheme you’re considering transferring and how much will it cost to make the transfer? Charges may also include any penalties involved.
• Investment risk – the level of risk of the pension fund you’re invested in and the fund or funds you’re considering investing in. Are they suitable for your appetite for risk? And;
• Guarantees or ‘safeguarded’ rights – does the existing scheme provide any guarantees like bonuses or a guaranteed annuity rate (income) at retirement? Losing these may be very costly.

Also, don’t be tempted to base your decision to transfer solely on “past performance”. The performance of a fund is not guaranteed and may not be a good indication of the future performance. Besides, chasing past performance of a fund that may not be suitable, is expensive or involves giving up guarantees, could be a very risky thing to do.

Transferring benefits from a DB pension scheme to a DC pension is a completely different exercise. By definition, you would be giving up certain guaranteed benefits in favour of benefits that are not guaranteed. The benefits will rely on future investment returns, interest rates and inflation. Alongside this, the value of your pension will be reduced by charges.

Therefore, you should be very cautious about transferring benefits from a DB pension scheme and we recommend that you avoid firms who are actively promoting the idea of doing this.  However, there may be specific reasons or circumstances that mean a DB transfer would make sense.  For example, your health and the death benefits, whether you have any dependants, when you want to retire, how much the lump sum benefit might be and what other income or assets you have available for your retirement. However, you need to fully understand the options and risks as well as the potential benefits.

Therefore, if you are considering a DB transfer it is imperative that you get professional advice from someone who is appropriately qualified and registered with the Financial Conduct Authority (FCA) as a ‘pension transfer specialist’.  This is a high-risk area of advice and has cost for a firm that is prepared to provide this advice. Therefore, any advice and recommendations will have commensurate cost attached.

To help you, we have prepared a document about our own DB pension transfer process. This will provide you with a better understanding of the work and costs associated with this area of advice.