A Guide to Pension Transfer Options
Ever since 2015’s Pension Freedoms paved the way for more flexibility regarding pension transfers, British people have moved billions of pounds of retirement wealth. In this guide, you’ll learn about the transfer of pension benefits and what the process could entail for you.
We’ll outline a range of scenarios, but it’s always a good idea to take professional advice before making any decisions about your pension plans.
Get in touch and we’ll connect you with one of the expert advisors that we work with. They can help you to really understand the best pension transfer options for you, and answer any questions you may have.
Here’s what you’ll learn in this article:
- What are my pension transfer options?
- What are my pension transfer options if I’m in a defined benefit scheme?
- What are my pension transfer options if I’m in a defined contribution scheme?
- Pension transfer FAQs
- Speak to a pensions expert about your transfer options
Find more information about pension transfers in our comprehensive guide.
What are my pension transfer options?
Your pension transfer options will mainly depend upon:
a. Whether your pension is a defined benefit or defined contribution scheme
b. What you want to get out of your pension transfer
What are my pension transfer options if I’m in a defined benefit scheme?
Also known as a ‘company pension’ or ‘final salary pension’, a defined benefit scheme as a promise by an organisation to pay you a pension directly.
If you want to learn more about how defined benefit schemes work, take a look at our guide to defined benefit pensions.
Transferring pension benefits is impossible in some kinds of defined benefit schemes
Certain ‘unfunded’ public sector schemes won’t allow any kind of pension benefits transfer, although it is occasionally possible to move your pot to another defined benefit scheme.
In many instances, you have to wait until you reach the age of retirement (defined in the scheme) before you can do anything with them. If you’re in doubt, ask your scheme provider.
What about schemes that you can transfer out of?
Less restrictive DB schemes include local government pensions and many private sector schemes. However, if the value of your pension is greater than £30,000, you’ll have to take professional advice before moving it. Make an enquiry to speak with one of the pensions experts we work with.
Is transferring out always the best option?
It depends on your pension. As we’ll say many times in this article, many defined benefit pensions are a pretty ‘great deal’, and you’re unlikely to get something better by transferring out.
However -some private companies that have offered defined benefit pensions have gone into administration, meaning that they were unable to keep paying out the rate they once promised. In such instances, the Pension Protection Fund has stepped in, but
What are my pension transfer options if I’m in a defined contribution scheme?
Defined contribution schemes are plans in which your retirement income is ‘drawn-down’ from your pension pot, or the return on your investments that your pension pot holds.
They have grown with the decline of defined benefit pensions, and many are referred to as ‘flexible-access’ due to the fact that they are designed to be more flexible than the older styles of pension.
If you want to know more about how defined contribution pensions and flexible drawdown works, take a look at our guide to Drawdown.
As you’d imagine, when it comes to transfers, these kind of pension are the less restricted of the two options.
What can you do with a defined contribution pension?
You can transfer into a range of other kinds of defined contribution pensions, such as SIPPs, SSAS, group personal pensions, personal, stakeholder pensions and so on. It’s unlikely that you’d be able to transfer into a defined benefit scheme.
What can’t you do with a defined contribution pension?
You can’t transfer it into a defined benefit pension.
Pension Transfer FAQs
Here are some FAQs around pension transfers.
What should I bear in mind before transferring my pension?
Regardless of the kind of pension you want to transfer, there are a few things that you should bear in mind first.
Check that you can actually transfer as much as you want, and that your new provider will accept it
You’ll need to see if your current pension scheme allows you to transfer out the sum you want to move, and that the scheme you want to move into will accept a transfer.
Make sure you’re transferring to a registered UK scheme
If the scheme you’re transferring to is not registered, HMRC will deem the move to be ‘unauthorised’ and will hit you with massive tax surcharge. This also applies if you try to withdraw a lump sum.
If you’re unsure about the scheme that you’re transferring into, you can ask your new scheme to provide you with its ‘Pension Scheme Tax Reference’ (PSTR) number. This is a 10 character number, consisting of 8 numbers followed by 2 letters, e.g. 12345678AB.
What’s a benefit crystallisation event and how does it affect my pension transfer options?
In pension transfer, a benefit crystallisation event (BCE) is essentially a test carried out every time you withdraw money from your pension pot.
A BCE is tested against your lifetime allowance and, if you exceed your allowance, you’ll be charged tax on the excess. At the time of writing, there are 13 different kinds of BCEs and your lifetime allowance is £1,055,000 in the tax year 2019–20.
In the context of your transfer options, every BCE reduces the amount of money, with tax relief, that you can transfer to an authorised scheme.
I want to transfer my pension abroad, what are my options?
If you’re looking to transfer abroad, you have two main options.
Option 1: Transfer to an Overseas Pensions Scheme – ‘QROPS’, ‘ROPS’ or ‘QOPS’
Who’d have known HMRC enjoyed so many acronyms? HMRC has a number of ‘authorised’ foreign pension schemes that are eligible for tax relief, including QROPS, ROPS and QOPS.
HMRC publishes a regularly updated list of ROPS here, but if you’re unsure you should definitely get a confirmation in writing from your provider. Speak to a professional advisor if you have any doubts.
Option 2: Transfer to an ‘International SIPP’
An alternative is to consider an international SIPP.
Unlike an overseas pension scheme, international SIPPs are domiciled in the UK (for tax purposes) and subject to UK regulatory oversight, whereas most QROPS are not. There also tends to be more variety in the structure of overseas pension schemes.
Take a look at our guide to SIPP vs QROPS to get a better understanding of how these two options compare.
Do I always need to seek financial advice if transferring my pension?
Not always, though sometimes you do. For example, if you’re thinking of transferring safeguarded pension benefits of £30,000 or more, or you want to move out of guaranteed annuity, you’ll need to speak to a financial advisor first.
You’ll always want to bear in mind that in pension transfer, safeguarded benefits are not accepted by every kind of provider, even if you’ve taken advice.
What are my pension transfer value options?
Note: this applies to transfers from defined benefit pensions only.
If you want to transfer out of a defined benefit scheme, the money you’ve built up us converted into a final sum, which is referred to as the ‘transfer value’ (sometimes referred to as the ‘CETV’ or ‘cash equivalent transfer value’).
At this point, this sum of money must be invested into:
- A SIPP
- Some kind of personal pension
- A similar defined benefit pension scheme
That said, transferring out might not be in your best interest. For example, if you take some or all of the transfer incentive as cash, you may have to pay tax on it.
We’d recommend that you speak to one of the experts that we work with first. They can help you to see if you’re being offered a good deal or not, and help you to explore other pension transfer out options.
How do I safeguard the pension benefits I’ve built up if I’m transferring?
Safeguarding the protected benefits that you have built up in a defined benefit pension is really a matter of transferring to an equivalent scheme that allows you to carry over your benefits. Or not transferring at all, if you can’t find a scheme to transfer to that can match your current arrangement.
As we said, transferring isn’t always the best option with DB pensions, especially ones in which you’ve built up a lot of benefits. Speak to an expert if you need some guidance.
What’s a pension risk transfer and what are my options?
Pension risk transfer is the process in which a defined benefit pension provider decides that it doesn’t want to keep paying out to retirees who receive an income from the scheme.
Your pension risk transfer options will depend on the kind of risk transfer scenario you end up in. We’ve outlined these below.
In this scenario (which is most common), your provider will try to entice you to leave the scheme. For example, by offering you a large lump-sum of money, or other incentives on top of your CETV.
This is sometimes known as an ‘incentivised transfer’ – and may only be offered to members of the scheme who are likely to cost the plan more in the long term, such as younger employees. You can choose to refuse these benefits and stay in the scheme anyway.
The alternative is a Section 32, or ‘Buyout’. In these instances, your provider will move your pension scheme over to a new company (typically an insurance firm). It’ll ‘clone’ the benefits that you had before, and may restructure the scheme into a defined contribution model. In cases like this, you don’t have a say.
In other instances, the employer will close its defined benefit scheme to new members at retirement. In this scenario, the employee would be paid a pension on the basis of the scheme rules; this might be a percentage of their final salary based upon years of service.
Talk to a pension transfer expert today
If you have questions about your pension pot transfer options and want to speak to an expert for the right advice, call Online Money Advisor today on 0808 189 0463 or make an enquiry.
The experts we work with have access to the whole of market, meaning that they can find great deals that may not even be accessible to the public.