Five Essential Considerations Before Transferring Your Pension

Amyr Rocha Lima

4 min read

As you approach retirement, you might find many adverts encouraging you to transfer your pension to a new provider.

While there are benefits to this, transferring a defined contribution (DC) pension requires careful evaluation. Making an informed decision is crucial to avoid potential regrets. In this blog, we'll cover the five most important things to consider before transferring your pension.

Key Insights

💰 Charges Matter: Understand all fees involved before transferring your pension.

📈 Investment Risks: Higher returns come with higher risks; align with your goals.

🔒 Guaranteed Benefits: Be aware of any guaranteed benefits you might lose.

🔄 Flexibility: Ensure the new pension scheme offers the flexibility you need.

💷 Tax-Free Lump Sum: Check if transferring affects your tax-free lump sum.

1. The Impact of Charges

Understanding the charges involved in transferring your pension is vital. Fees can include exit charges from your current pension, initial costs, and advice fees for the new one. If you're using a direct-to-consumer pension provider, there may not be advice fees, but initial charges might apply.

Compare the annual charges of your current pension with the new one. Your existing pension might have lower charges, especially if you are part of a large company with better-negotiated terms. Higher costs in a new pension mean it needs to grow faster to make up for the charges, potentially increasing investment risk. Remember, the more you pay in charges, the less you'll have available for your retirement income.

2. Variability in Investment Performance

The promise of superior investment performance can be tempting. However, investment markets are unpredictable, and higher returns often require greater risk. With defined contribution pensions, you decide how to invest, but many providers offer 'off the shelf' solutions to help you.

Ensure that the investment strategy of the new pension aligns with your risk tolerance and retirement goals. Comparing the performance of different pensions isn't straightforward, as various factors, including investment strategies, affect returns. Make sure you fully understand the potential risks and returns before making a decision.

3. Loss of Guaranteed Benefits

Some DC schemes, especially older ones, may include guaranteed benefits such as a guaranteed annuity rate. These benefits can offer a higher level of income security in retirement compared to current market rates.

If you have invested in an old With-Profits fund, it might offer a guaranteed growth rate. Transferring away from such a scheme could mean losing these benefits, which could be detrimental to your retirement income.

4. Access to Pension Funds and Flexibility

Consider how easily you can access your pension funds. Pension freedoms rules provide greater flexibility over how you access your pension in retirement, but not all schemes offer the same options. If flexible access to your funds is important, ensure the new scheme provides this capability.

This flexibility also applies to the treatment of your pension upon death. Modern pension contracts should offer various options for your beneficiaries, but always check before making a transfer to ensure you don't lose important benefits.

5. Loss of Enhanced Tax-Free Lump Sum

You can usually take up to 25% of your pension as a tax-free lump sum, with a maximum limit of £268,275, known as the lump sum allowance. This applies from age 55, increasing to 57 in 2028. However, some older pension schemes may allow a larger tax-free lump sum. Transferring to a new scheme could mean losing this enhanced entitlement, potentially increasing your income tax liability when accessing your pension.

Final Thoughts

Transferring your pension is a significant decision that can impact your financial future. It's essential to approach this decision with a comprehensive understanding of your current and future needs. Consulting with a CERTIFIED FINANCIAL PLANNER™ can provide independent and fair advice tailored to your unique situation and needs. While there are costs involved in seeking advice, they might be lower than the potential costs of making a mistake on your own.

Taking these considerations into account will help ensure that you make an informed decision that supports a secure and flexible retirement. Always weigh the benefits against the potential drawbacks and seek professional guidance to navigate this complex decision effectively.

For a more detailed discussion on this topic, please feel free to contact us. Our team are always available to answer your questions and to help you with any of your financial planning needs. Here’s what we offer: A cup of coffee… and a second opinion.

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