Many pensions should not be transferred and left exactly where they are. We cover some of the reasons below:
Defined Benefit
These pensions offer a guaranteed income when you reach retirement. It will normally increase each year, and usually continue to be paid to your spouse, civil partner, or dependants, often at a reduced rate, when you die. You’re more likely to have one if you’ve been employed in the public sector or have worked for a large company in the past.
There can be some niche circumstances where a transfer can make sense. But the transfer value you get in return normally undervalues the benefits you sacrifice. A starting point could be to assume that transferring this type of pension might not be the best option.
Some of these pensions will also have an additional voluntary contribution pot linked to the scheme, which can give more flexibility when it comes to accessing tax-free cash. Your pension provider should be able to confirm these details and your options if they apply.
Guaranteed Annuity
An annuity provides you with a retirement income that’s guaranteed for life. If your pension scheme comes with a guaranteed annuity rate (sometimes referred to as a GAR), it may be a higher rate than what is available on the open market. You could be better off sticking with your current pension and buying the annuity through your existing provider.
To find out whether you have one of these, just contact your pension administrator. If you have a pension without a GAR, you’ll usually get a higher annuity income if you shop around.
If your pension has a GAR, the way the annuity income is paid is often hard-wired into the plan, which might not be what you’d automatically choose. You might be able to change the basis of the annuity, but this could affect the initial rate offered.
Section 32 Plans
Some company pensions that contain benefits that were built up before April 2006 might allow members to take more than the maximum 25% tax-free cash entitlement that applies to most pensions. This can mean more of your plan can be claimed without paying tax on it.
However, just because it has this feature, it doesn’t automatically mean a transfer shouldn’t be considered. It depends on the size of the enhanced tax-free cash and the growth prospects in the scheme, as well as the retirement options available to you (which could be limited). You can ask your provider for a pension statement which should explain your options and detail any protected benefits you hold.
Some old company pensions might also allow you to take benefits from them before age 55 (the earliest you can usually take money from a pension, rising to 57 from 2028).
It might also be possible to retain the enhanced tax-free cash entitlement or protected retirement age when transferring, although certain conditions do need to be met.
Employer Contribution
Your employer might have put you into a pension scheme that you don’t like. However, transferring that pension will only make sense if the contributions your employer makes on your behalf can carry on being paid into the pension scheme you want to transfer to.
Some employers will allow these to be redirected, but most won’t. In these instances, it’s usually best to wait until you leave their employment before deciding to transfer, so that you continue to collect the contributions in your current scheme.
If your provider doesn’t allow for redirected payments, you might consider transferring just part of your pension. That way you can keep your employer pension open and benefit from the best of both worlds. Just check for fees first, and that you won’t lose any valuable benefits or guarantees.
Exit Penalties
Most modern pension plans charge little or nothing to transfer. But some older style pensions can charge bigger sums, including market value reductions if you’re invested in a ‘With Profits’ fund. So, it’s important to contact your provider and check this before deciding to transfer.
There is an exception to the rule though. If you’re 55 or over and have a personal or stakeholder pension, early exit fees are capped at a maximum of 1%.
Previously, early exit fees penalised those who had reached 55, but not the ‘retirement age’ agreed with their pension provider.
This cap means if you’re fed up with your existing provider, a low-cost transfer is usually available ahead of taking any income, or lump sum. This might be of particular interest if your current provider doesn’t offer access to all the main retirement options – drawdown, lump sums and annuities.
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This article is for informational purpose only. It does not constitute finacial, tax or legal advice, nor is it a recommendation to buy, sell or hold any investment. Past performance is not a guide to the future, investments rise and fall so investors could make a loss. No view is given on the present, future value or price of any investment and investors should form their own view on any proposed investment.