Transferring a pension: why professional advice matters

4 Jun

Pension transfers might seem like a straightforward financial decision but they often come with hidden complexities that you may not know about unless you seek professional financial advice. Many Britons transfer their pensions without understanding the valuable benefits they could be surrendering in the process.

While pensions form the backbone of retirement planning for most UK residents, the decision to transfer them deserves careful consideration. In fact, what appears beneficial on the surface might actually cost you thousands in lost benefits, guarantees and tax advantages. Before making any moves with your retirement funds, you need to understand exactly what's at stake.

Why do people transfer their pensions?

Pension transfers in the UK are driven by practical considerations that can significantly impact retirement outcomes. Workers on average have 11 jobs throughout their career and therefore accumulate several pension pots throughout their working lives, creating both challenges and opportunities for improving their retirement finances.

Many people find that bringing their pensions together helps them to avoid the administrative headache of managing multiple accounts. Moreover, if you have had multiple jobs, there's a real risk of losing track of pension pots entirely. Back in 2016, the government launched a pension tracking service website due to a staggering estimated £400m being lost in unclaimed pension savings. This website is still up and running today and can be found here. Consolidation means dealing with a single provider, receiving one set of paperwork and having a clearer overview of your retirement finances.

For reduced fees and charges

Pension charges can dramatically erode retirement savings over time, making fee reduction a compelling reason for transfers. Different providers charge vastly different management fees and older schemes typically have higher fees than newer ones.

The financial impact of reducing fees can be substantial. For example, on a £100,000 pension pot, reducing annual management charges from 1% to 0.5% saves £500 annually. With a smaller £30,000 pension, switching from a provider charging 0.75% to one charging 0.5% saves £75 yearly, while switching to one charging 0.3% saves £135 annually. Additionally, some providers offer tiered fee structures that become more competitive as your pension pot grows, providing further incentives to consolidate multiple smaller pots.

Access to better investment options

Investment choice varies significantly across pension providers and this can profoundly affect long-term growth. Old pension schemes may have limited options or be invested in lower-growth areas like bonds or cash. Consequently, many savers transfer to access a wider selection of funds that better match their risk tolerance and retirement timeline. Some modern providers offer specialist investment options, including direct investment in shares or property. Others provide opportunities for sustainable investing that align with personal values.

Self-Invested Personal Pensions (SIPPs) typically offer greater investment flexibility than workplace pensions, giving more control to those who want to actively manage their investments. Nevertheless, this increased choice must be balanced against potentially higher fees and the time required to manage investments actively.

To gain more flexible retirement income options

Not all pension schemes offer the full range of withdrawal options. Some older pensions don't provide income drawdown facilities which allow you to keep your pension invested while taking income as needed.

Essentially, pension drawdown represents a key flexibility that many seek through transfers. Instead of converting your entire pension into an annuity, drawdown lets you tap into your pot whenever required while keeping the remainder invested for potential growth.

Furthermore, some providers offer specially designed "Investment Pathway Funds" that align with specific retirement goals whether you're planning to buy an annuity within five years or anticipating taking income over a longer period. Modern flexible pension plans frequently include options that older plans simply don't offer, such as providing income for loved ones after your death.

This flexibility becomes increasingly valuable as retirement approaches, allowing for more tailored financial planning that responds to changing circumstances.

Types of pensions and how they affect transfers

Understanding the different types of pensions is crucial when considering transfers, as each comes with unique rules and potential pitfalls. The pension landscape in the UK consists of several schemes, each affecting transfer options differently.

Defined contribution (DC)

Pensions, commonly known as personal pensions, build up a pot of money through your contributions, tax relief, employer contributions and investment returns. Unlike other pension types, DC schemes offer considerable flexibility for transfers. You can typically transfer these pensions at any time before drawing benefits and, in many cases, even after you've started taking money from them.

Defined benefit (DB)

Pensions, often called "final salary" schemes, provide a guaranteed lifetime income based on your salary and length of service. These pensions primarily come from public sector employers or older workplace schemes.

The Financial Conduct Authority (FCA) and The Pensions Regulator (TPR) believe it's in most people's best interests to keep their DB pension. If you transfer from a DB scheme to a DC scheme, you forfeit guaranteed lifetime income, inflation protection and dependant benefits. This is why it is essential to see professional advice before completing a pension transfer. In fact, for DB pension transfers exceeding £30,000 in value, you must legally obtain financial advice from an FCA-authorised adviser. This rule protects consumers from potentially losing valuable benefits. It's worth noting that some DB schemes, including Teachers, Civil Service, and NHS schemes, cannot be transferred at all.

Ultimately, understanding your specific pension type is fundamental to making informed transfer decisions, as different schemes involve varying levels of risk, protection, and potential benefits.

Conclusion

Making well-informed decisions about UK pension transfers requires careful consideration of numerous factors. Undoubtedly, while consolidating pensions can simplify administration and potentially reduce fees, these benefits must be weighed against what you might sacrifice. Above all, remember that valuable guarantees, once surrendered, cannot be reclaimed.

The pension transfer landscape changes constantly with evolving regulations and market conditions. Consequently, what makes sense today might not be appropriate tomorrow. That’s why it’s essential to seek professional advice before making any decisions, especially when the stakes involve your long-term financial security.

At Tatton FP, we provide clear, independent guidance tailored to your personal goals and circumstances. Whether you’re considering transferring a pension, consolidating multiple pensions or simply exploring your options, our expert advisers are here to help you to make confident, well-informed choices.

Please note: This blog 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). Your capital is at risk. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected 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.

Workplace Pensions are regulated by The Pensions Regulator.

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Cost – Initial consultation is free of charge, and your adviser will agree a suitable pricing structure based on your individual recommendations.

The Financial Conduct Authority does not regulate Trust or Inheritance Tax Planning.

Anna Abbott