A guide to switching your pension pot
If you want to get the best possible return from the money you save in your pension, then you may need to switch where it is held.
What is pension switching?
If you are saving into a pension right now, chances are it is what is known as a defined contribution pension.
With a defined contribution pension, the size of your pension pot when you retire is reliant on the performance of the assets your money has been invested into.
Obviously, this performance can vary hugely depending on what your money has been used for - and what you have been charged to make those investments.
As a result, there may be occasions when you decide that you want to move between pension providers, taking your pension away from one and moving to a rival provider.
This is called pension switching.
It is distinct from pension transfers, which is when a pension saver moves from a defined benefit pension (also known as a final salary pension scheme) into a defined contribution pension.
Why would I switch my pension?
There are plenty of reasons you might want to switch your pension provider.
A big one is the appeal of consolidating if you
happen to have more than one pension. This can easily happen if you switch employers a couple of times, thanks to the workplace pension scheme which forces bosses to open pensions and contribute to them.
It is not easy to keep track of a handful of different pensions - in fact, you could end up losing details for one, leaving you with less money in retirement than you should have. Another important consideration here are the
charges that you pay your pension provider. These firms do not just look after your cash out of the goodness of their hearts - they will charge you a host of different fees, based on the size of your pension pot and where it is invested.
If you feel that you are paying too much for your pension, you might want to switch to a different provider with a cheaper fee structure. After all, the less of your pension pot that goes towards paying fees, the more there is left for you once you actually reach retirement.
And finally, there’s performance.
While fees are very important to what your pension pot looks like by the time you give up work, ultimately, it is the performance of the investments which will have the biggest bearing on the size of your pot.
So, if you are not that impressed with how your pension is performing then a pension switch might be worth considering.
The downsides of switching a pension
It is important to bear in mind that there are some potential downsides that come from switching out of a particular pension scheme. The biggest is that you will lose any attached benefits that come from being a member of that scheme. For example, the scheme may include life cover for members, which you will be sacrificing by moving your money out of the scheme.
There may also be costs associated with the switch that you should take into consideration as these costs may erode the potential benefits that come from your switch.
Do I have to get advice?
Some savers are required to get proper independent advice before carrying out a switch.
Some pensions include what are called ‘safeguarded benefits’, which according to the Pensions Advisory Service are “special valuable features attached to a pension which guarantees its holder benefits which may be better than what they could receive on the open market”.
A good example is guaranteed annuity rates, which would mean you could cash your pension pot in for a more significant income for life than you might get by purchasing an annuity through the market.
And rules state that if the value of those safeguarded benefits is above £30,000, then you will have to get advice before you can switch your pension.
However, even if your benefits are less substantial it may be worth a chat with a financial adviser to see if the switch is really worth it.
At Brian Mole IFA, we have a team of independent financial advisers who have vast experience in guiding and advising people through the complicated process of pension switching.
If your boiler breaks, you call a heating engineer. If your lights go off, you call an electrician. Pensions involve far bigger figures and are far more important to you than household issues.trying to deal with the world of pensions yourself could be a very expensive mistake. The adviser will arrange an appointment to suit you, initially on the phone or in person and either at your home or in our office.the choice is always up to you.