THINGS TO CONSIDER BEFORE

COMPARE TRANSFER VALUE AGAINST GUARANTEED INCOME

Request a ‘cash equivalent transfer value’ – the sum offered in return for giving up the defined benefit pension – and compare it to the pension payable at retirement if you stick with the scheme.

For instance, if the expected pension is £5,000 a year and the transfer value is £100,000, this suggests just 20 years of income. Also, a member is taking on all of the future risk associated with managing the investment. Any increases in income from a defined contribution plan will have to be funded by investment returns – and these cannot be guaranteed.

CHECK PENSION PAPERWORK

Transfer value statements can be misleading and riddled with errors. Some employers quote the pension entitlement at the date a member left a scheme. If that was years ago, any annual inflationary increases may have been omitted – flattering the transfer value.

BEWARE TAX CATCHES

Savers who transfer to take the

whole pension as cash are risking paying a lot of tax. The first 25 per cent is tax-free but the rest is liable to the rate of income tax you currently pay. Put it in a bank account and it will be eroded by inflation too.

There may be good reasons to make the move – to buy a holiday home, pay off a mortgage or help children. But the consequences of giving up the guarantees, such as inflation-linked annual increases must be considered.

UNDERSTAND WHAT BENEFITS WILL BE LOST

Common perks include a 50 per cent spouse’s pension and children’s pensions if you die and inflation proofing – fine to give up if you have no dependants. Some schemes provide a higher tax-free sum than the usual 25 per cent too.

COMPARE VALUE WITH AN ANNUITY

Use an annuity calculator to work out if a transfer value represents value for money. Wealth at Work calculates that £30,000 offered in lieu of £1,500 a year would cost £68,000 on the open market to replace with an annuity – an income for life – if that annuity offers perks including a widow’s pension and inflation proofing.

CONSIDER PARTIAL TRANSFERS

Offered by a few schemes, these provide a compromise for those wanting freedom – and guarantees.

ASSESS THE SECURITY OF A PENSION SCHEME

Switching can be tempting for those worried about the financial strength of an employer. While the Pension Protection Fund pays up to 90 per cent of a defined benefit pension income, if a scheme fails, there is an annual cap of £34,655, which may fall short.

CHOOSE AN ADVISER QUALIFIED FOR THE TASK

Find one at unbiased.co.uk or financialplanning.org.uk.