When to move your pension money
Looking for better terms makes sense, but make sure you won’t lose valuable perks, says Ed Monk
In case you hadn’t realised it, building a retirement fund that matches your expectations is a tough ask. For most, it requires committing a significant chunk of salary every month – and even that may add up to only a few thousand pounds of extra income each year in retirement. Every possible advantage should be grabbed, and making sure the money you have put away is working as hard as possible is key. This may require moving money from one scheme to another for better terms.
Here’s our checklist for transferring pensions to get the most from your savings.
Why transfer pensions at all?
By transferring money from one scheme to another it may be possible to lower the fees that eat into your retirement fund. For those confident in making their own investment decisions, it could also give access to a wider range of investments that better suit your needs.
Track down your schemes
The first job is to establish exactly what pension savings you have. List all the schemes you have been a member of – you will need to track down details for each one.
If you are not sure if you were contributing to a pension at a previous place of work, bear in mind that before 2014 you would have had to elect to join a scheme. After that, you may have been automatically enrolled into one, following a change in the law. Make contact with previous employers to find out.
But Michelle Cracknell, chief executive of the Pensions Advisory Service, warned that this was not always straightforward. “The admin of some schemes, particularly older ones, is not what it should be and so it can be a bit painful,” she said.
Large companies may have facilities to provide you with further information, but you may have to make do with simply obtaining the name of the scheme. A government service helps track down old pensions ( gov.uk/find-pensioncontact-details), including those attached to companies that have since shut down.
Get the details you need
Deciding whether to transfer savings from one scheme to another requires a comparison of the terms of each.
First, establish the type of pension it is. “Defined benefit” schemes, sometimes referred to as “final salary”, pay a guaranteed income for life based on years of service rather than what you contribute. These tend to be more generous than “defined contribution” schemes, where the money you end up with is the sum of contributions made by you and your employer, plus any investment growth.
Maike Currie, an investment director at Fidelity Personal Investing, said: “It’s usually a bad idea to move from a defined benefit scheme unless it offers unusually generous terms for the switch or if you are in poor health, single or in heavy debt. You may also have to pay for financial advice.” In other words, it is likely to be a mistake.
For defined contribution schemes, you need to compare charges, investment options and other terms of the schemes in question. The standard policy documents should include these and be available from the scheme administrators.
What are you getting and how much does it cost?
Schemes take your money and invest it, at a cost. Most workplace defined contribution schemes have a limited choice of investments and, if you don’t select otherwise, will place your money in a simple “default” fund that “tracks” global shares and bonds without making bets beyond that.
Do not assume that these simple funds are poor choices or unsuitable – many financial professionals use the same tactics. What matters is how much they cost. For workplace defined contribution schemes, an annual investment charge (look for the “ongoing charge figure”) of around 0.5pc is reasonable, but the cheaper the better.
It may be possible to shave this down by transferring to a new scheme. A self-invested personal pension (Sipp) can be opened through an investing platform and “tracker” investments bought for a similar price. A Sipp will also allow you to opt for other types of investment, including funds run by popular managers. This will cost more but may be worth it if you want the extra flexibility and believe you can select better-performing investments.
We have tables that can help you choose the best-value Sipps at telegraph.co.uk/sipps.
Don’t give up valuable benefits
Even if transferring to a new scheme will give you better-value investments, be aware that your old scheme may come with perks that are too good to give up. Some older schemes have “guaranteed annuity rates” – which is a promise to convert your pot into an income at a rate agreed in the policy document.
Ms Cracknell said: “These rates are often very attractive. Guaranteed annuity rates were often offered in contracts until the midNineties, when annuity rates were much more favourable than at present.”
Other schemes come with guaranteed investment returns – these applied mainly on pension policies that were invested in a “withprofits” fund. Some policies that were written in the Eighties and Nineties offered a guaranteed minimum investment return of 5pc per annum.
Ms Currie added that you could also be benefiting from life insurance as part of an older scheme.
Beware of exit fees
The value of your fund in an old scheme may not be the amount that gets transferred. Exit fees and other adjustments can mean you get significantly less. Some with-profits pensions come with big reductions if you decide to leave early. Factor in any such fees when you decide whether to transfer.
Watch out for scams
The worst outcome is to transfer to a scheme offered by unscrupulous providers – or outright criminals. Any scheme that offers early access to your pension before the legal minimum of 55 should ring alarm bells – tempting as it may sound, it is likely to trigger huge tax charges.
Many of the worst scams involve transferring to “small self-administered schemes”. These are unlikely to be necessary for most savers so do not proceed without investigating further.
If in doubt, get help
If you are unsure about the benefits of transferring pensions, help is available. An independent financial adviser can be good value for those with larger sums. Others can use free guidance from the Pensions Advisory Service (0300 123 1047, pensionsadvisoryservice.org.uk).