Pension Switching and Consolidation
Make your pension work harder
Understanding whether you will benefit from a pension transfer can be very complex and you should always receive professional advice. Everybody’s circumstances are different, so you won’t necessarily benefit from a pension transfer just because other people you know are transferring their pensions to new schemes. But there are situations where it does make financial sense to transfer your pension to a different plan.
A pension transfer is the process of transferring – ie switching or changing – the value of your contributions that are in one pension scheme to another pension scheme. For example if you have £50,000 sitting in one pension scheme and you want to transfer it to another pension scheme.
Doing this ends your membership of the original pension scheme.
Understanding whether you will benefit from a pension transfer can be complicated and you should always take advice from an independent financial adviser before arranging a pension transfer. In this section, we’ll explain how pension transfers work, what the main rules are and what you need to think about if you’re considering transferring one pension to another. We’ll also look at some common questions about pension transfers.
Pension charging structures have changed dramatically over recent years. Due to the introduction of stakeholder pensions the charges applied to new stakeholder benchmarked plans are far lower than in the past:
- Many individuals now find themselves with outdated, overpriced pension contracts.
- It may be possible to transfer to a cheaper plan with the same provider.
- Investment returns on many pension plans have fallen well short of what has been achieved in the open market.
Understanding whether and if you would benefit from a pension transfer can be complicated and you should always take independent financial advice before arranging a pension transfer.
Everyone’s situation is different, so you won’t necessarily benefit from a pension transfer just because other people you know are transferring their pensions to new schemes.
However, there are other situations where it does make financial sense to transfer your pension to a new or different scheme – here are a few possible examples:
- Your existing company scheme is being wound up.
- You have a personal pension that has high fees and you would like to transfer it to one of the new breed of low-fee stakeholder personal pensions.
- You have loads of small pensions, perhaps from a variety of employers, periods of self employment and various Additional Voluntary Contributions (top-up) plans and you would like to amalgamate them all.
- You would like to add your existing personal pension to an occupational pension scheme to benefit from lower fees/employer contributions. Only a minority of employers allow this.
- You can’t transfer any state pension benefit.
Almost all types of occupational and private pensions can be transferred. There are some exceptions, however, particularly for public sector workers:
- If you left a public sector pension scheme before 1st January 1986, you can’t transfer
- If you are a member of a final salary pension scheme that provides a pension that rises in line with inflation, you can’t transfer
- If you are within one year of your pension scheme’s retirement age, you can’t transfer
The good news is that in all of the scenarios above, you would almost certainly end up with a big reduction in your pension entitlement if you transferred to a different pension – so the rules are protecting you.
Common Pension Questions
Can I transfer a pension into cash or an ISA?
No. Money in a pension fund can not ever be taken out of it until you retire – and even then there are strict rules controlling what can be done with the money. You can only ever transfer money from one pension to another pension. The reason for this is (mostly) to do with preventing fraud. Pension contributions are subject to tax relief – you don’t pay income tax on money you put into your pension. If you could then transfer it out again to cash, the result would be widespread tax evasion!
I think I have some pensions I have lost track of over the years. Can I find these and transfer them into my current scheme?
You will need to take professional advice over whether to transfer your lost pensions, but you can find them using the government’s Pension Tracing Service, or alternatively appoint Credencis to work on your behalf.
My employer has just gone bankrupt. What will happen to my company pension?
You may have heard or read in the newspapers of people losing their entire final salary pensions due to their employer going into administration. The good news is that the government now provide some protection from this. The Pension Protection Fund was launched in April 2005 and will take over company’s pension responsibilities in situations like this, subject to some limits. Whatever happens, you shouldn’t be left with nothing, although your pension may not be quite as much as you would have had originally. When a company becomes insolvent (bankrupt), their pension scheme will normally have to be wound up and closed. If you are in this situation with a final salary pension, you probably won’t be able to transfer your pension out once the company has gone into administration. You will have no choice but to wait until the winding-up process is complete to see how much you will get, but unlike people in the past, you should be protected by the Pension Protection Fund.
My employer has offered me a cash lump sum to switch from the company's final salary pension scheme to a personal pension. Is this a good idea?
Final salary schemes are increasingly expensive for companies to run, and not surprisingly, many companies are closing them as fast as they can. It’s perfectly legal for your employer to make you an offer like this – but remember that they are only doing it to save money, not to help you. If you are offered a cash incentive, remember that you will have to pay income tax on this money – which could reduce its value considerably.
For bespoke pension transfer advice contact Credencis.
We will analyse all the facts and figures to see whether you will benefit from transferring between pension plans.
We can investigate your plans to establish vital information about the fund performance, the investment strategy, any asset allocation, and finally the charges. We will work with you to consolidate your pensions into one arrangement so you can benefit from reduced charges, and better investment performance. We will send you regular statements and review your investments on an ongoing basis to help you achieve the best possible growth for your funds.