Should you transfer your pension?
There are several reasons why transferring a pension might seem like a good idea. These include widening the range of available funds, lowering the cost of fund management, and amalgamation of several pensions into one more easily administered scheme.
Whilst it is possible to transfer a defined benefit scheme, it is not often a good idea to do so. The benefits that such a scheme gives, including guaranteed income, are often unachievable through transfer to another scheme.
If you are thinking about transferring your current pension plan(s), then you need to seek advice from a qualified pension professional. There are many reasons why transferring your pension plan may be a good idea, but equally as many reasons why you should not make such a move. A wrong decision now could cost you the retirement you desire and deserve.
The most important things to know
Is transferring all your pensions into a single scheme a good move?
Certainly, when it comes to administering your retirement it would be easier to cope with one policy rather than several. There may also be benefits from a new scheme that are not available on all your present pensions. However, the most careful consideration should be the costs of transfer of all your existing pensions into one. If one of your pensions offers you all the features and benefits you want, it might also be possible to transfer all your other pensions into it. A financial advisor will be able to answer this question for you.
Will you lose any benefits you currently have?
Some pensions have certain benefits that would be lost by transferring into a new scheme. You may have death benefits or even a guaranteed annuity rate that cannot be commuted to a new scheme. Annuity rates have been reducing through the last few years, and to lose such a benefit would be folly.
Some pension schemes may give a protected tax free cash lump sum of more than 25%. Whilst this is rare, older policies should be checked for this valuable benefit and serious consideration given before transferring.
What costs will be charged within the new scheme?
A new scheme may look attractive, particularly if it gives access to a far wider range of funds and you want to be more active in fund selection. The Key Features document will tell you what commissions and fees are charged in the scheme and for each fund. There is no guarantee on investment growth rates, but charges are levied throughout. These expenses could severely damage final fund values and the amount available to you to purchase income at the time of retirement.
Are there penalties upon a transfer?
Some pension schemes levy penalties if you transfer out of them, especially if you have only been in the scheme a short time. These penalties could wipe thousands from your fund, which may not be replaced by growth in your new scheme.
Is the fund choice in the new pension right for you?
The new scheme may have a far larger number of funds than your current scheme, but are they right for you? Will they meet your attitude to risk? What are the costs of switching funds within the new pension scheme? These are just some of the questions you should ask a financial advisor when considering a new pension scheme on the basis of fund choice.
How about a stakeholder pension?
A stakeholder pension is limited as to the costs that it can impose upon scheme members. For this reason alone it is worth considering whether a stakeholder scheme would meet your other requirements. If your advisor recommends against a stakeholder scheme, ensure that you understand what the reasons for doing so are. It may be because of limited fund choice, or lack of death benefits, etc.
Finally, what on-going advice is needed in regards to the new scheme?
You should review your pension schemes and retirement planning at regular intervals. Your attitude to risk will change over time, and as you move toward retirement you may need to seek ways of securing your pension benefits. If the advisor receives recurring payments from the pension scheme provider, then these will affect the value of your fund. It may be that you have the experience or knowledge to administer changes to your pension scheme without the need to visit an advisor, in which case you should make sure that you are not paying for advice that you don’t receive.
Switching to a different pension scheme and/ or new provider may look like a good move, but doing so could incur penalties or charges that will damage your fund value and your income in retirement. You need to be very careful that valuable benefits are not lost through a transfer.
A good financial advisor will make you fully aware of the pros and cons of affecting a pension transfer including the costs of doing so, not just at the time of transfer but also through the lifetime of the pension.
If you are considering transferring out of your current pension(s) into a new scheme for simplicity, fund choice, or cost, and are not sure whether doing so is a good idea, then you should seek the help of a financial advisor.
Make sure you ask him all the right questions, and that you fully understand the answers. By doing so, you will ensure that your retirement is as good financially as it can possibly be.