Lump sum Investments and pensions, Glasgow, Scotland

Tel: 0141 563 3260
between the hours of 9am to 5pm

Mobile: 07714 090845

Transferring your pension

Pension transfers can be complicated and there are many things to think about before going ahead.

If you are thinking about transferring your current pension(s) into a new personal pension plan or self-invested personal pension (SIPP) we've set out seven key questions for you to consider. But remember, whether a transfer is suitable or not will very much depend upon your individual circumstances and objectives. This information cannot cover everything you will need to think about but they can help you to start.

If the scheme you are thinking about transferring out of is an occupational salary-related pension scheme there are some specific risks involved which you should be aware of.

The main advantages of salary-related pension schemes;

These schemes aim to pay you a pension based on:

  • the number of years you have belonged to the scheme (pensionable service);
  • your earnings that your pension scheme benefits or contributions, or both, are calculated on (pensionable earnings);
  • the proportion of those earnings you receive as a pension for each year of membership (the accrual rate).

The schemes provide some protection against inflation. This protection starts on the date you leave the scheme and therefore stop building up benefits, until your retirement (and in many cases continues after you retire). Even if you're no longer building up benefits in the scheme, you will often be entitled to more than just a pension when you retire. Benefits vary between schemes. You can check what your benefits are by reading your membership booklet or contacting the pension trustees.

Risks - of staying in your salary-related scheme

The cost, potential loss of benefits and risks of transferring from a salary-related pension scheme to a money purchase pension scheme often outweigh the advantages. However, staying in a salary-related pension scheme is not risk free. If the employer is still in business, it usually has to ensure the scheme has enough funds to provide the full entitlement of all members. But some of the employers sponsoring these schemes have gone bust and there hasn't been enough money left to pay the pensions promised. If the employer is going out of business without enough funds in its pension scheme, the Pension Protection Fund may be able to help. The government set up the Pension Protection Fund in April 2005. It pays some compensation to members of salary-related pension schemes that can't provide the benefits in full. The level of compensation is usually less than the pension that would have been paid if the employer had stayed in business.

Closing or winding up a pension scheme

Your employer may close a salary related pension scheme to new or existing employees and offer a new pension scheme. The scheme trustees will give you information about your options. Check that you have considered the potential risks of leaving your benefits in the final salary scheme.

Your employer may wind up the pension scheme completely. If so, the trustees must follow the scheme rules to make sure all of the scheme's benefits are secure. If an employer is going out of business, its salary-related pension will be wound up automatically. A wind-up can happen in other circumstances too. If there are plans to close or wind up your pension scheme, the scheme trustees will give you information about your options.

Getting help

It can be difficult to make suitable decisions without advice, even when you have all the information you need. So unless you are absolutely sure, you should seek professional financial advice.

Seven key questions to consider

Will the new pension be more expensive than my existing one(s)?

  • If the new pension costs more make sure you are satisfied that any additional costs are for good reason. For example, if the new pension is offering you access to more funds than your current pension(s), ask yourself whether you need them. You wouldn't take out a more expensive mortgage or insurance policy without good reason, so why do so with your pension?
  • You will get information about the costs of the new pension in the Key Features Document that the pension provider or your adviser should give you. Make sure the Key Features Document refers to the actual funds and investments that you will be using in your new pension. You need to read the documents you are given so you can clarify any issues you are unsure about.

Would a stakeholder pension meet my needs and objectives?

  • Stakeholder pensions are usually cheaper than other personal pensions and it is important that the adviser considers a stakeholder as an option and discusses it with you. If you or your adviser doesn't think a stakeholder would be suitable for you make sure that you understand why this is.
  • If you or your adviser think a pension with more features (for example, more funds) would be better than a stakeholder pension be confident that you need them.
  • Some stakeholder pensions now provide access to quite a wide range of funds. So even if you are looking for some flexibility in your investment choices there may well be a stakeholder pension to suit you.

Is it a good idea to transfer all of my pensions into a single new pension?

  • If you currently have several pensions and are looking to put them into one new pension, make sure you are aware of any costs. If you are taking advice your adviser should be able to explain them to you.
  • You may not necessarily need a new pension to put all your pensions together. If one of your existing pensions already meets your needs and objectives it might be possible to transfer all of your other existing pensions into that one.

Will I lose any benefits?

  • It is possible that your current pension may have valuable benefits that you would lose if you were to transfer out of it, such as death benefits or a Guaranteed Annuity Rate (GAR) option. A GAR option is where the insurance company will pay your pension at a particular rate, which may be much higher than the rates available in the market when you retire.

Are there any penalties if I transfer?

  • Some pensions may apply a penalty when you transfer out. These can be significant – sometimes several thousand pounds (depending on the size of your fund) – so it is important to check if one may apply in your case.
  • Will the investments in the new pension be right for the amount of risk I am prepared to take?

  • You may want to decide for yourself how to invest your money, or if you are getting advice your adviser may make recommendations for you. Either way it is important the investments chosen are appropriate for the amount of risk you are currently prepared to take with your money – remember, investments can go up or down.
  • An adviser can help you decide how much risk you are prepared to take if you are unsure and can explain the risks and potential benefits of different funds and investments to you.

Will I need ongoing advice?

  • Depending on the new pension you choose it may be important for you to have ongoing reviews. Some fund selections may need to be reviewed from time to time to maintain the balance of your portfolio.
  • It is also possible that the amount of risk you are prepared to take could change over time – for example, if your financial situation changes, or as you get nearer to retirement.
  • Your adviser should explain this, and whether it applies to the pension they recommend. If so they may be able to offer you an ongoing service.
  • Remember that you may have to pay additional charges to your adviser for this which, if paid for through the pension, will increase the cost of the new scheme.
  • Ask yourself if you have enough knowledge and experience of investment to make decisions without the need for an adviser.