Moving your pension pot from one scheme to another may at first glance seem like a lot of administrative hassle for little gain. But not all pension schemes were created equal, and a transfer to a better deal could help your money to work harder for you, or bring other meaningful benefits in years to come.
Pension transfers generally involve old pensions from past jobs. A 2015 study by accounting trade body AAT found that the average UK worker now has six jobs during their career. That means you’re more likely to have money in a range of different pension schemes, which can easily get left behind as you move through your working life.
And old pensions may not be the best. Claire Trott, head of pensions strategy at financial adviser SJP, says: “We have seen major changes to legislation over the years, but this doesn’t force [workplace] schemes to offer the widest options.”
So, what potential reasons should you consider when you review an old defined contribution (DC or investment-based) pension pot?
When to Transfer a Defined Contribution Pension
One key issue is what a pension actually offers in terms of benefits. Many older schemes may restrict the way pension benefits can be taken, or the options if you die. Trott says: “Restrictions on retirement benefits can be dealt with at retirement, and that may be the best time to transfer, but restrictions on death benefits aren’t something that can be rectified at the time, so it makes sense to check your scheme offers the options you would choose in that event.”
Another important consideration is the investment choices offered by your pension fund. You might decide to move if you can’t find what you’re looking for – a decent range of ESG-focused funds, perhaps, a selection of low-cost track funds, or a choice of investment trusts.
Transferring your pension may also enable you to reduce the fees you’re paying, for in admin charges to the scheme and your holdings. Older schemes in particular can be relatively expensive. Make sure you get a balanced view of all the charges involved, both for the existing scheme and for the proposed transfer scheme. In particular, keep an eye open for any punitive exit fees attached to older schemes.
There are also the administrative benefits of consolidation. By bringing all your old pensions together into a single portfolio, you can see exactly how much you have invested, how it’s performing and what you’re paying. Often people use a self-invested personal pension (Sipp) for this purpose, as it gives them full control over their retirement savings.
However, Trott warns that while consolidation is often a wise move, it doesn’t always make sense: “Having all your pensions in one place can make things simpler in the long run, but shouldn’t be done if it means you’re going to lose other valuable benefits.” This can often be particularly true of older schemes. Pensions taken out in the 1980s or 1990s, for example, may offer a guaranteed annuity rate (GAR) of perhaps 9 to 11% (in contrast, current annuity rates are around 4%).
Meanwhile, schemes that were in place before April 2006 may offer higher tax-free cash allowances than the current 25% or lower pension ages, which could be lost if you transfer out of the scheme. There are, however, sometimes ways to mitigate this, says Trott: “We are still seeing cases where the full value of the pension scheme could be paid out entirely tax-free because of the rules that were in force before April 2006.”
This is one area of your finances where it really makes sense to take specialist advice. It’s vital to ensure that all the benefits within the current scheme are checked and carefully assessed.
When to Transfer a Defined Benefit Pension
The reasons for transferring defined benefit (DB) pensions – often known as final salary pensions – are different. Transfers of DB pensions became big news after 2015, the year when pension freedoms were introduced.
In 2018, the Financial Conduct Authority (FCA) estimated that around 100,000 pension holders were transferring out of their DB pensions each year, with an average pot worth more than £250,000 – meaning up to £30 billion a year has been moving out of DB schemes annually. Pension consultancy Mercer suggests average transfer values have likely risen since 2018 because interest rates, which help determine them, have fallen since then.
Many savers have been attracted by the huge transfer values (the amount you get for transferring out of the scheme) on offer for their modest DB pensions. Another appeal is the relative flexibility of the rules of investment-based DC pensions into which their money is being transferred. Unfortunately, in many cases people are also influenced by poor advice from financial advisers who only received a payment if the transfer went ahead. That practice, known as contingent charging, was banned in October 2020.
The reality is that most people are better off with the hassle-free, inflation-linked, guaranteed income for life (and valuable benefits for surviving spouses) of a DB pension.
But a transfer may be worth considering in certain circumstances – for example, if you and your partner already have a decent retirement income and you want to be able to bequeath this pension to your children (which you can’t do with a DB pension); if you don’t expect to live long and therefore won’t get much ‘value’ from your DB pension; or if you wanted to retire significantly earlier than the DB pension age would allow.
Given the complexities, larges sums involved and long-term implications of a bad decision, law requires that anyone contemplating a DB transfer worth more than £30,000 must take advice from a suitably qualified adviser.
