Changing employers throughout a working career is commonplace in today’s world and with those changes come not only a new job or career but they also bring questions regarding a number of topics. One of the most important issues to consider that will affect your long term financial security is what to do about pension savings that have been accumulated over the years with previous employers. Should a pension be left where it is or should it be transferred upon leaving a position either for retirement or to a new employer? The following information should help to illuminate the topic and guide the reader to a better understanding of their options.
The first question that needs to be addressed is the reason for a pension transfer and what benefits it would offer. Some of the reasons for a pension transfer and some possible benefits include:
- High fees on a personal pension – fees may be reduced by transferring to a stakeholder personal pension or a self-invested personal pension (SIPP)
- Existing scheme with your current employer is being wound up – Although Trustees on a scheme that is being wound up typically arrange for a bulk buyout to transfer member’s benefits into annuity contracts, members may also be offered the option to transfer their benefits to an s32 buyout or a personal pension.
- A desire to add a personal pension to a pension scheme offered through your employer. Personal pension schemes sometimes carry higher fees than employer offered schemes so this might be a good option. Although not many employers will allow this, it is worth examining depending on the fees associated with an employer-based offering compared to your current personal pension scheme.
- Combining multiple pensions accumulated from past employers or times of self employment – Some employer schemes will allow you to transfer your old pension accounts into these and if allowed, will likely offer a higher return and lower fees on your investment.
Note: State Pension benefits cannot be transferred.
There are a number of options available to those wishing to complete a pension transfer and the best course of action one can follow is to seek the advice of an Independent Financial Adviser (IFA) who will offer unbiased advice on what type of pension would be most suitable to your particular situation. Although IFA’s are regulated by the UK Financial Services Authority, they frequently specialise in specific areas of the financial arena so be sure to search for an adviser who primarily works on pensions and not another area of financial expertise.
The bottom line is to get the best return from your pension!
There are some basic guidelines to follow when researching your options to assure the best possible return on your investment.
Insist on a Transfer Value Analysis!
This will detail the benefit of your current pension fund(s) compared with the possible yield of alternative pension schemes. It will give comparison information to show if a scheme will grow fast enough to match or exceed your current pension scheme.
Determine your Retirement Goals
You will need to be sure that the scheme you are considering is consistent with your retirement goals and offers the flexibility to accommodate them.
Stick with your Current Plan?
In some cases it is best to leave things as they are, such as if your current scheme is in a fund that is in surplus, meaning assets exceed liabilities, or if it is offering a high yield return on your investment.
Different Kinds of Pensions and How They Could Be Affected if Transferred
There are two basic pension types used. Understanding the types of pensions is necessary because when transferring to a new scheme different methods of calculation will apply.
Money Purchase Pension Schemes
This type of pension, also called a Defined Contribution pension, combines contributions from all participants in the scheme and invests them into a fund. Upon retiring your total contributions will be added up and an annuity will be purchased based on that total. The annuity returns a guaranteed income throughout your years of retirement for life, although the benefit amount is not fixed.
Effect on Money Purchase Pension or Personal Pension If Transferred
If you decide to forge ahead with a transfer there are some steps you will need to take in order to ensure that you receive the maximum return with the new scheme. First, you will need contact your present pension scheme administrator in writing to request a statement of transfer value. Whilst this will tell you the current value of your portfolio, it does not ensure the value once it is transferred. Penalties may also be applied for early withdrawal from the present scheme in the form of exit penalties. Also make sure to read the fine print, as there may not be any guarantees on value!
Most investments in this type of scheme are in shares or stocks of a particular enterprise. This type of financial vehicle can fluctuate substantially in a very short time as it is driven by market conditions. Keep in mind that your current pension scheme administrator has six months to comply with your transfer request and this could mean a dramatic difference in your final transfer value, either less or more, depending on market conditions at the time the transfer is executed.
Company Final Salary Pension
With this type of pension scheme, participants receive a pension equal to a set percentage of their final salary at the time they retire or sever employment with the company. Also called a Defined Benefit pension, participants in this type of scheme know up front what their monthly benefit payment will be as it is pre-designated, and the amount of the contributions they made does not affect the amount.
Transferring a Company Final Salary Pension is possible, but it is strongly recommended if you decide to transfer that it be to another Final Salary Pension scheme. There are few instances that this type of transfer would be advisable and it is typically better to leave this kind of pension scheme alone.
If you choose to proceed, you will need to contact your current pension scheme administrator in writing to request a Statement of Entitlement. The administrator will then have three months to comply with your request, forwarding a transfer value statement of your pension, although it could possibly decrease the pension transfer value . From the statement date, the value of your pension funds will be guaranteed for three months and the guarantee date will be noted on the documents they send you.
If you choose to proceed with the pension transfer , be sure to complete the request prior to the guarantee date. This will ensure you will receive the value listed on the statement. The pension scheme administrator then has six months to comply with your request.
Types of Pensions That Can Be Transferred
Most types of pensions, both private and occupational pensions, are transferrable with a few exceptions. These exceptions include:
- Public sector pension schemes where employment ended before 1 January, 1986
- A final salary pension scheme providing inflation adjusted benefits (these rise to keep pace with inflation)
- When you are within one year of reaching retirement age for the pension scheme
Rules preventing certain transfers or withdrawals from pension schemes are in place to protect pensioners, as they would normally incur a substantial reduction in benefits if transferred to an alternate pension scheme or if cashed out.
Along with the restrictions on pension transfers , there are also some other limitations that have been put in place to protect the funds in your pension account.
Once money has been contributed to a pension fund it is not possible to withdraw the funds unless transferring them to another pension scheme until you reach retirement age, then there are strict rules in place governing the way the money is used. Taking lump sum cash withdrawals from your pension account is never allowed.
Transferring funds from an old pension account into a new one is not always allowed so before requesting a transfer be sure to consult an IFA for further advice. There are no requirements at this time that pension scheme plan administrators must accept transfers from other pension plans.
Sometimes an employer will offer a lump sum cash distribution to encourage employees to change from a final salary pension to a personal retirement investment scheme in an effort to save money on employee benefits. This is legal for them to do and will save the company a sizable amount in benefit expenses, but it may not be the best course of action for the employee.
One result of taking a lump sum cash incentive is that you will be required to pay income tax on the distribution, reducing the value of your investment. If your employer offers you this type of incentive, it is strongly advised that you seek pension transfer advice from an IFA before making a decision about transferring out of the pension scheme.
