Your pensions are powerful tools for retirement saving. Every time you contribute, you can benefit from tax relief and you may receive employer contributions too, so you could build a significant pot over time.
Additionally, the funds in your pension are usually invested on your behalf, so you may see your savings grow.
The level of growth you achieve depends on what your pension is invested in, as well as any associated fees you might pay. That’s why it’s important to choose your scheme carefully.
Fortunately, if you aren’t happy with your current provider for any reason, you can usually transfer your pension savings to a different scheme. You might do this to benefit from lower fees, better performance, or fund options that align more closely with your financial plan.
You might also have several pensions with different employers. Combining them into one scheme could make it easier to manage your savings.
Yet, transferring your pension isn’t always the most sensible decision and you may want to weigh your options first.
Read on to learn five important considerations to make before transferring a pension.
1. Beware of pension transfer scams
You may decide to transfer your pension to a scheme that promises better returns or lower fees, but you might need to do your research first because it could be fraudulent.
According to Money Marketing, pension scams cost UK consumers more than £26 million between 2020 and 2022.
Fortunately, the Financial Conduct Authority (FCA) introduced new regulations in 2021 to help prevent pension transfer scams. The new rules took away the statutory right to transfer a pension. Now, trustees and scheme administrators have the right to stop the transfer if they see certain “red flags” associated with the new provider or the circumstances of the transfer.
These common red flags include:
- Promises of guaranteed returns
- Large tax-free withdrawals
- Early access to pension funds
- Unusual or unregulated investment options
- High-pressure sales tactics.
However, the new regulations haven’t removed the danger of pension transfer scams altogether. Consequently, it’s important to do your due diligence and ensure that you are moving your savings into a legitimate pension scheme.
It may be beneficial to seek professional advice as we can help you determine whether a pension transfer is safe or not.
2. Check whether you will pay exit fees
Exit fees – charges you must pay when moving your savings out of a pension scheme – are less common than they used to be as the FCA banned any new schemes from implementing them. They also capped exit fees at 1% for any savers over 55.
However, if you have your savings in an old pension, there is a chance that you might pay exit fees.
Although they are capped at 1%, you could still pay a large sum. For instance, if you have a pension pot worth £200,000, you might pay £2,000 in fees.
If you’re under 55, the amount could be significantly higher than this.
In some cases, it may be worth paying exit fees if you are likely to save more by moving to a different pension provider. Yet, you could be worse off overall if you pay a large exit fee, so it’s important to check this before transferring your pension.
3. Consider the performance and fees of the schemes
When deciding whether to move your pension to a new provider, you may need to consider the average performance and fees of your current pension scheme and the new one. This may show you whether you are likely to benefit from the transfer or not.
The growth you are likely to see from your pension varies a lot depending on the funds you choose to invest in. Even different funds from the same provider can generate very different returns. That’s why it’s important to carefully research a new provider and their investment options.
It may also be useful to compare the various fees. These might include:
- Annual management fees – normally a single fee covering all charges, capped at 0.75% of your investment.
- Policy fees – these costs usually come under the annual management fee but some older pensions may charge separately.
- Ongoing charges figures – to cover the day-to-day running of an investment fund.
- Platform fees – to cover the administrative costs associated with your pension.
- Transaction, trading, and switching fees – charges for buying and selling certain investments.
Depending on the pension provider, you may pay a different combination of these fees. Typically, workplace pensions charge a single annual management fee, and their fees tend to be lower than private pensions you set up yourself.
However, this isn’t always the case and it’s crucial that you understand what you will pay before transferring your pension.
If you’re unsure whether transferring your pension will make it easier to achieve your financial goals, we can help you understand the fees and fund options.
4. Consider the level of risk you adopt
Knowing what fees you are likely to pay and what level of growth you can expect could help you determine whether a pension transfer is suitable for your financial plan. Yet, it’s equally important to consider the level of risk you adopt.
The investment options offered by the new provider may carry a different level of risk to the funds that your current provider invests in. You may need to consider whether the investment strategy of the new pension provider aligns with your attitude to risk and financial plan.
Additionally, if you move from a workplace pension to a private pension, you may have more control over the specific products you invest your savings in. While you may prefer this level of control, it could also increase the risk you adopt (and potentially fees that you pay), especially if you’re not very experienced with investing.
In this instance, it may be useful to have a professional manage the investments on your behalf.
5. Check if you will lose any benefits
Certain pension schemes, especially older ones, may offer additional benefits. For instance, a defined benefit (DB) pension, sometimes called a “final salary” pension, typically pays an income for the rest of your life.
Some pension providers may also offer benefits including:
- Life cover
- Pension benefits for family members when you die
- Guaranteed annuity rates
- The option to access funds earlier than other pension schemes.
You may want to check whether you are likely to receive any of these benefits, particularly if you have older pensions. If moving your savings into a new scheme means that you lose valuable benefits, a transfer may not be the more sensible option.
Get in touch
With our guidance, you can decide whether a pension transfer will help you meet your financial goals.
Please get in touch to find out how our team of VouchedFor Top Rated planners could support you today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pension Regulator.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.