Why you should transfer your pension
Keeping on top of your pension planning is the key to a happy retirement. Here's how to do it in five easy steps.
If you move regularly from job to job, you may have built up a whole collection of pension schemes during your working life.
That's fine in theory, but the trouble is when your pensions are here, there and everywhere, it's very difficult to keep track of them all.
The chances are if you have an older-style pension which has been running for years; you may find the charges are pretty high compared with newer schemes. And it probably won't be invested in the best possible place either.
So, what should you do?
Surprisingly few pension savers know that pensions can be transferred. So, if you're unhappy with how a fund is performing, you have every right to move it somewhere else.
But, as with all things pension-related, switching is not a decision to be taken lightly. You'll need to make sure you aren't giving up any valuable benefits - or triggering any nasty penalties - when you move the scheme.
Having said that, consolidating all your pensions into one new and improved home can make a lot of sense. Let's take a look at how to go about it.
How to transfer your pension:
Step 1: Decide if it's worth it
This is the tricky bit - deciding whether it's better to stick where you are, or take the plunge and move somewhere new.
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See the guideTo help you make up your mind, the first thing you need to do is ask your pension provider for a valuation of the scheme so you can see how well it has performed. Then get a 'transfer value' which shows you whether there are any exit penalties when you switch the scheme. Remember, pension valuations and transfer values fluctuate daily.
With-profits
Newer schemes may not charge for transfers, but older pensions - particularly those invested in the not-so-good with-profits funds - could hit you very hard if you leave.
The worst performers of the with-profits world could deduct as much as 20% of your pension fund when you transfer it. If that happens, it may be worth hanging on to see whether the penalties ease. If the performance of the with-profits fund improves, exit charges are likely to be reduced.
If the prospects for the fund don't look good, it may be better to suck up the exit penalties, and hope you can recoup some of your losses in a new, stronger-performing fund.
Lost benefits
As well as exit charges, you'll also need to take a look at the benefits you might be giving up if you transfer. Firstly, if you're lucky enough to have an old final salary scheme, it's actually highly unlikely that a new scheme will be able to match the benefits on offer. So, a word of warning here: be very careful before you move a final salary pension, because it will almost certainly be a mistake.
Secondly, some pension schemes offer valuable Guaranteed Annuity Rates (GARs) which means the income you receive when you retire is likely to be significantly more generous than you would get on the open market. This could apply to schemes opened in the 1960s right up to the mid 80s. Read Could you increase your pension income by half? to find out more. You really must think twice before you transfer and lose your GARs.
Don't panic if you can't make head nor tale of your pension statements. If you're struggling with these decisions, it's a very good idea to seek help from an independent pension adviser. But, don't forget, they will charge for any recommendations.
Step 2: Choose a new scheme
If you find some of your old pensions are looking a bit dodgy, it's time to find a better scheme to move them to. What you're looking for is a pension with low(ish) charges, decent performance, flexibility and investment choice.
Jane Baker explains how to take control of your own retirement planning with a self-invested personal pension.
Of course, it's your call, but I'm a big fan of low-cost self-invested personal pensions or SIPPs. Take a look at How to pick your first pension for some guidance on what to look for. The principles here apply just as much to pension transfers as they do to first-time pension savers. You might find how to choose the right SIPP and How to put together your SIPP help too.
Step 3: Choose how you want to invest your new pension
As well as picking a new pension provider, you'll also need to choose some pension funds where you can invest your transferred pension and any future contributions. Take a look at my article Why pension savers should still trust the stock market for my take on how to save for retirement.
Step 4: Compare projections
Once you've chosen your favourite new pension and selected your pension funds, it's a good idea to ask for a projection of retirement benefits. Do the same for the old funds in your original scheme and compare the two.
Remember that projections can only give you a very rough idea of benefits because they are based on assumed growth rates. But they will allow you to compare the charges, and hopefully you'll be able to see how much cheaper your new pension is.
Step 5: Start the transfer
When you're happy with everything, start the transfer. You'll need to complete an application for the new pension as well as transfer forms to move over your old pensions. It may take some time to complete the transfer if your old pension provider is a bit lacking in the efficiency department. Feel free to bug them relentlessly if you feel they're dragging their heels!
When all your pensions are in one place, it will be so much easier for you to judge how well they're doing, and make sure you're on track for the retirement you always dreamed of. Good luck!
This is a classic article that has been updated for 2011.
More: Boost your pension by £20,000 | Middle-class pensioners are doomed
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Comments
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Many years ago, I noticed that a frozen pension was reducing in value every year so I decided to transfer it into my current one. Due to a number ofr mishaps, this process took over 5 years. At this time, I noticed that allthough the pension had remained constant, the transfer value had increased sustantially. The incoming scheme quoted on the revised transfer value and was worth considerably more on transfer. When I changed employers again, I also transferred the pension again. The new scheme was even better than the old scheme and I am now drawing the enhanced pension. Management charges would have eaten into my pensions if I had left them where they were. There is always the other advantage that you will not have to go chasing round to locate all the pensions once you retire!
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I appreciate that the article refers to existing Money Purchase (Defined Contibution) schemes. However, if you are reading this and are in a Final Salary (Defined Benefits) pension scheme - whether contributory or non-contributory - for heavens sake, seek independent financial advice as to whether it is even appropriate to transfer out. In the majority of cases, it is inappropriate, given all of the associated benefits such as life cover, death in service, dependents pension and in some cases, long-term disability cover (all features in my Scheme). I managed a Portfolio within my own Bank's Pension Review, following the mis-selling in the 90's and where our Insurance Department had supported such requests from our customers, we had to financially redress the position because the Money Purchase Schemes were simply not keeping up with the overall benefits of the Final Salary equivalents. This meant we would either re-establish them in their company scheme if permitted, placing them in the same or marginally better financial position than they would have been had the transfer-out not been undertaken, otherwise we had to compensate them with the scheme they were presently in. This was a costly exercise and perhaps nowadays, such a scenario would not occur and unless one was grossly misrepresented or mis-sold, you'd be stuck in a poor Scheme, so you'd need to absort the suggested advice provided above. An alternative if you wish to top-up your pension and understand that you may be unable to contribute further to your Final Salary Scheme, would be to make Additional Voluntary Contributions (AVC's) and perhaps you can arrange this through your employer, where they pay all or some of the annual charges associated with administering the Scheme. On the other hand, you can make AVC's independently, but once again, talk to an IFA. One option there is to ask your friends/family if they can recommend one who has assisted them and provided quality service, or alternatively, shop around and perhaps speak to 3 or 4 IFA's yourself. I'm also a member of the Consumers Association and I have access to their website which supports a separate section where you have a detailed list of tradespersons in your area and recommendations by fellow subscribers. But for heavens sake, think twice before you act upon transferring your pension, since that is generally your future life's income stream...that's what history teaches us all.
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04 April 2011