Updated: May 31, 2019

Pension Transfers Explained

Want to tansfer your pension to move to a better plan? Find out how to do it the right way in this guide

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Tony Stevens

Author: Tony Stevens - Finance Expert

Updated: May 31, 2019

For millions of people, a pension transfer is the key to maximising their retirement income. But how do pension transfers work? What the benefits or drawbacks? And does the type of pension you have make the process any different?

To answer all of these questions we’ve put together this comprehensive guide where we will cover:

What is a pension transfer and how do they work?

This is when you move your pension pot from one scheme to another. Many people do this in search of a better deal, to take advantage of features their pension provider doesn’t offer or to consolidate more than one existing pension, among other reasons.

You can see the Financial Conduct Authority’s (FCA) official definition on their website here.

A pension transfer involves a member making a written application to either the scheme administrator or pension provider requesting an up-to-date value of their benefits and informing them of their intention to transfer these funds to a different scheme.

The administrators then have a particular time frame in which to carry out these instructions. The member may also be legally required to seek professional advice before they can proceed.

When professional advice is legally required

It is a legal requirement to seek professional advice if you want to transfer your pension pot and you are:

  • A member of a defined benefits pension scheme and your fund is worth more than £30,000

Or

  • A member of a defined contributions scheme where the fund is worth more than £30,000 and you are entitled to a guaranteed annuity rate.

If you do not fall into either of the above categories but still want advice on transferring your pension funds, speak to an independent pensions advisor.

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What are the benefits of a pension transfer?

The key benefit of a pension transfer would be to provide greater flexibility and control over your retirement fund.

There are a number of valid reasons why you may want to consider transferring your pension, such as:

  • A desire to consolidate a number of different pension plans under one umbrella
  • Your existing pension fund is due to close
  • The investment choice available with your current provider doesn’t fit your investment objective
  • Your unhappy with the existing terms available with your current scheme
  • Your current scheme charges seem high and you want to consider cheaper options
  • You’re moving abroad and want to transfer your pension fund to a provider based overseas
  • Your investments are under-performing in your current plan
  • The investment risk does not match your attitude to risk
  • Your existing pension fund may require an annuity to be purchased and/or not allow benefits to pass to loved ones on death
  • Your current plan may not have provision for Pension Freedoms like cash free from 55 years of age
  • You are 55 or over and need funds (perhaps from your tax-free lump sum in your pension) but your existing plan won’t allow this

Rules and restrictions

The feasibility of whether a pension plan transfer is possible will largely depend on the type of pension you currently hold, as explained below.

Transferring a defined benefit pension

Yes, it’s possible but only with certain schemes. Unfunded defined benefit pensions, such as those offered to teacherspolice and NHS employees do not allow transfers under any circumstances.

Of all the different types of pensions available in the UK, transferring out of a defined benefit (also known as final salary) scheme represents the largest risk of being worse off as a result, due to the level of benefits available to members and their families.

For example, a transfer from a defined benefit scheme to a defined contribution scheme means you are exchanging pension funds that guarantee an income for life once you retire and a commuted pension for your spouse when you die (assuming that an ‘expression of wishes’ has been completed).

A defined contribution scheme cannot offer such security nor can it guarantee the fund value will not fall as well as rise due to its reliance on the performance of the underlying assets of the fund.

Defined contribution pension transfers

It’s possible to transfer a defined contribution pension elsewhere. But before deciding to proceed it’s important to scrutinise the features and perks of each scheme to ensure you’re not missing out on any benefits.

For example, it’s quite common in a UK pension scheme for your employer to make regular contributions in addition to your own. However, these payments would be lost with a transfer to another provider but only if this was an ongoing pension. If it were frozen/dormant, then this would not be the case.

If you have a number of different pension funds it may feel easier to manage them all within the same pot. However, you need to be sure these funds will not incur any significant fees or charges by transferring them all to one provider.

Transferring a SIPP

You can transfer your SIPP to another provider. It may be that you have identified a provider who offers a wider variety of investment asset classes or more sophisticated software to allow you to switch and monitor your pension fund.

In keeping with the nature of these types of UK pensions you can transfer between providers by yourself rather than using the services of a professional advisor. However, if you would prefer to speak with a SIPP specialist, make an enquiry and we can arrange for someone to get in touch.

Stakeholder pensions transfers

You can transfer stakeholder pensions to other providers. Of all the different schemes available in the UK, stakeholder pensions are regarded as the most portable and should not incur any charges for transfers going out or coming in.

How to transfer your pension fund

If you’ve decided you definitely want to transfer your pension to a new provider of a similar scheme or a different type of pension altogether, the procedure for transfer of a pension account will differ depending on what scheme you have.

Not every UK pension provider will accept transfers, therefore, it’s important you check that this is possible before proceeding, but before you speak to your pension provider, you should seek professional advice first.

Make an enquiry with us and we’ll match you with an independent pensions advisor for free.

Transferring out of a defined benefit pension

If you are no longer in the pensionable service of an employer where you were a member of a defined benefit scheme you have a statutory right to transfer your pension benefits to another scheme.

To transfer out of a defined benefit (DB) pension you first need to inform the scheme trustees of your decision and request a statement of entitlement (usually in writing). They will then convert the benefits you’ve accrued at that point into a cash sum called a cash-equivalent transfer value (CETV).

The trustees will send your statement of entitlement within three months of receiving your request, which will include your CETV. For DB schemes the CETV is guaranteed for three months during which time you will need to decide whether to go ahead with the transfer of your pension account or not.

Once you’ve decided to go ahead the CETV must be transferred by the trustees within six months of receiving your request.

Your CETV can be transferred into a:

  • Employer pension scheme
  • Personal pension
  • SIPP
  • Stakeholder pension

If your pension fund is worth more than £30,000 then a scheme trustee will need confirmation you have taken professional advice before they are able to authorise any transfers.

It’s an advisor’s responsibility to outline the key differences between a DB pension and the new scheme you want to transfer into, including all the inherent risks attached to this course of action.

Why would someone do this?

Following the changes introduced in April 2015, allowing for much more freedom with how pensions can be utilised in retirement, there has been a steep rise in the number of transfers out of defined benefit (DB) schemes and into defined contribution plans.

The flexibility of income drawdown in retirement, highlighted in this article here has made such transfers much more appealing to DB members.

Other reasons typically given for transferring out of DB pensions include:

  • Allowing access to pension funds sooner (from age 55)
  • Adequate retirement provision already in place
  • Inheritance planning
  • Concerns that DB scheme may go bust
  • Employer incentive

Existing DB members receiving enhanced transfer values from an employer as an incentive to move out of their schemes are also becoming more common as companies struggle to cover existing pension commitments. This is due to annuity rates being so low, meaning that it is costing the schemes more at the moment to buy an annuity to meet the monthly payments.

These enhanced values can either be transferred in full to another pension or taken as a cash payment. If taken as cash, they would be subject to income tax and national insurance at the member’s marginal rate.

Transferring a defined contribution pension

For defined contribution (DC) schemes the process is quite similar to defined benefits and starts by requesting a statement of entitlement including an up to date fund transfer value from either your scheme administrator or pension provider.

Unlike defined benefits, a DC scheme does not guarantee the transfer value for three months and it can still continue to fluctuate in line with the performance of the underlying assets.

If you decide to proceed your provider has six months from receiving your request to complete the transfer.  Your DC pension can be transferred to an alternative DC provider (including a SIPP and/or stakeholder pension) or an employer pension scheme.

Remember, if the value of your fund is higher than £30,000 and has the benefit of a guaranteed annuity rate on retirement, you will need to seek professional advice from a pensions expert before the transfer can be completed.

Can you transfer a UK pension plan overseas?

Yes, if you currently live and work overseas it’s definitely possible to transfer any UK pension benefits to an offshore scheme. This can only happen if the pension scheme you want to transfer your funds into is recognised by HMRC as a qualifying recognised overseas pension scheme (QROPS).

To gain QROPS status a scheme must be regulated in the country where it is established and registered for tax purposes. If it does not have QROPS status your provider will not grant permission for the transfer to take place. If it does, the process is the same as for transferring to another UK-based pension.

There are a few extra steps involved if your pension transfer includes any UK contracted-out benefits.

If you’d like to know more about QROPS take a look at our detailed article on pension transfers from the UK to overseas.

Is it worth transferring a pension if you’re close to retirement?

This depends upon your own circumstances, however, most pension schemes do not allow any transfers within 12 months of your nominated retirement age.

Once you’ve started claiming your pension in certain retirement schemes, such as income drawdown, they do allow you to transfer from one provider to another if you’re unsatisfied with the amount of income you’re receiving.

Speak to a pension transfer expert

Pension transfers are an area of financial planning where it’s absolutely crucial you make the right choice. Getting it wrong could create issues for your retirement plans which can so easily be avoided with the right guidance and advice.

If you’re considering transferring your pension fund it’s really important you seek professional advice before making a final decision. It may also be a legal requirement.

If you have questions and want to speak to an expert for the right advice, call us today on 0808 189 0463 or make an enquiry here.

The advisors we work with have a wealth of experience in areas such as this and deal with customers in your situation all the time.

FAQs

What is critical yield and how does it affect a pension transfer?

A critical yield is a term often used during a transfer from a defined benefit (DB) scheme to a defined contribution (DC) scheme and provides guidance on how much the DC investment funds will need to grow to match what a member would have received from their DB pension.

It is used as an indication of risk and is something an advisor would be expected to cover when discussing the viability of a transfer with a DB scheme member.

What is an in-specie pension transfer?

An in-specie transfer usually applies to more specialised pension schemes (such as SIPPs). It is a term used when the ownership of an asset previously bought by a scheme member – such as property or shares – transfers across to a pension scheme rather than making a cash payment.

There are some quite specific rules laid out by HMRC for such transactions.

What happens if an employer who operates a defined benefit scheme goes out of business?

This is an ongoing risk for many members of a defined benefit (DB) pension. All employers who operate a DB pension must ensure the scheme has sufficient funds to provide full entitlement to their members.

If your employer goes out of business, leaving insufficient pension funds, as a member you can appeal to the Pension Protection Fund for compensation. If you’re successful it is not guaranteed that you will receive the full amount of your pension benefits.

Can I transfer my pension to my bank account?

You can, although only a quarter of your pension pot can be withdrawn as a tax-free lump sum. The remainder of your funds will be taxed as income.

For example, if you had £80,000 in your pot, you could take £20,000 as a tax-free lump sum. The remaining £60,000, along with any other income earned that year from work or state pension, would make you a higher-rate taxpayer.

An alternative to this bank account option is pension drawdown, where a portion of your money stays invested, and you get a steady stream of income from it.

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We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in pensions. Ask us a question and we'll get the best expert to help.

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Tony Stevens

Tony Stevens

Finance Expert

About the author

Tony has worked in a vastly diverse array of areas in the pensions industry for over 20 years. Tony regularly writes for trade press, usually on topical and pensions pieces as well as acting as a judge at prestigious national events.

Tony is also a highly qualified Independent Financial Adviser in his own right. His mantra has always been “Hope for the best, but plan for the worst”, and believes that the biggest impact that an adviser can have on a client’s life journey is to take them on a journey from generally having little or no real idea of what their retirement will look like, to giving them the understanding of what their retirement looks like now, then helping them navigate a path to what they want their retirement to be.

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