Transferring Defined Contribution Pensions
Often when an employee leaves a job, they are given the option to continue contributing to their current scheme. However, some people like to explore their options and transfer their defined contribution plan into a new scheme which provides them with more options.
Employees approaching retirement may also consider transferring their pension, often because their current scheme has too many fees and doesn’t provide a high enough income.
Transferring your pension can have a lasting financial impact for your retirement, so it’s important to carefully consider your options and seek professional guidance.
Can I transfer my defined contribution pension?
Depending on the terms of your pension scheme, you can usually transfer your defined contribution pension to a new scheme at any time.
Most pension schemes state that if you are going to transfer, you need to do it up to a year before you’re expected to start drawing retirement benefits.
Will I lose my benefits if I’m transferring out of a defined contribution pension plan?
Transferring your defined contribution pension into a new scheme could mean that you lose any benefits associated with the original scheme such as guaranteed income or death benefits. In return, you may receive a cash value.
For some pension holders, losing these benefits could outweigh the financial gains to be potentially made in a new scheme.
Because of this, it’s important that you speak to a pensions advisor who can calculate the best option for you.
Where can I transfer to?
There are many potential schemes that may be suitable for you, depending on your circumstances.
Options may include:
* A new employer’s workplace pension scheme
* A personal pension scheme
* A self-invested personal pension (SIPP)
* A stakeholder pension (SHP) scheme
Should I transfer my defined contribution pension to a SIPP?
The answer to this question depends on your retirement needs and circumstances.
Some pension holders decide that the potential profit exceeds the risk and so they transfer their defined contribution pension to a SIPP.
However, others nearing their retirement choose to move their pension from a SIPP into a scheme that offers more steady security and less risk.
Should I transfer my defined contribution pension?
Whether transferring your pension plan is a good idea, is largely based on your own circumstances as well as the terms of your current and future pension scheme.
Before you decide to switch, ask your current pension provider the following questions:
Are there restrictions on which pensions you can transfer?
* What is the transfer value of my pension?
* Are there any fees for transferring my pension and if so, how much?
* Will I lose the right to take out my money at a certain age?
* Will I lose any benefits eg a guaranteed annuity rate?
* Will I lose the right to take a tax-free lump sum of more than 25% of my pension?
* It may also be the case that you are happy to receive a cash incentive to leave you pension scheme early
However, transferring your pension to another scheme could result in you losing money. This is what’s known as a transfer incentive.
Should I transfer my pension if I’m offered an incentive?
A transfer incentive is usually a cash bonus offered to you by your employer, on agreement that you leave your pension scheme.
It may also be offered to you as an enhancement to the calculated transfer value of your benefits in the scheme.
The amount you receive as a cash incentive, could be based on:
* How long you’ve worked for the company
* Your age
* Your position within the company
It’s important to remember that if you leave your pension and take the transfer incentive, you may have to pay income tax and national insurance on it.
You also need to consider that you’ll get less pension than if you had accepted the incentive as part of the transfer value.
Calculate my defined contribution pension transfer value
Your transfer value, also known as a cash-equivalent transfer value or CETV, is the amount your pension pot would be worth if you moved it to a different provider.
In some cases, it could be more but in most cases, it will be less.
This is why it’s advisable to compare your pension pot value to your transfer value. If the transfer value is less, your pension provider may be charging you an exit fee.
How to transfer a defined contribution pension plan
After calculating your pension transfer value and seeking professional guidance, you may decide that you want to transfer your pension.
Firstly, you will need to decide where you would like to transfer your pension to. Speaking with a financial expert as well as a pensions professional can help you come to the conclusion of where you would like to move your pension.
Once you have compared your options and been made aware of any fees or financial implications that could occur after transferring, you can proceed to switch.
What are the costs of transferring a defined contribution pension to a defined benefit?
There may be fees involved if you’re thinking of transferring your defined contribution pension to a defined benefit scheme instead.
These could be:
* Potential exit fees: This may also be referred to as market value reduction, early surrender charge or transfer out fee. An exit fee can be charged as a flat fee or as a percentage of your savings. Therefore, the larger your pension, the more you’ll pay
* Management fee
* Financial advice: This is mandatory if your pension fund is worth over £30,000