Company pensions explained Transferring your company pension
People today work for an average of six employers during their working lives, so it's likely that you’ll have a few pension pots with a few different employers.
You can either leave these pots invested with your old employer or transfer them into another scheme.
This guide explains how to transfer your pension, and how to weigh up whether or not it's a good idea.
Should I transfer out of my final salary scheme?
If you belong to a final salary pension scheme, it's usually best to leave your money there rather than transferring to your new employer's defined contribution scheme.
This is because final salary pensions give you a guaranteed income when you come to retire.
Your final salary pension pot is not linked to how the pension scheme’s underlying investments perform, unlike defined contribution schemes. Final salary pensions also increase your leaving salary to keep pace with the rate of inflation.
Under the April 2015 pension freedoms, you can now transfer from a private defined benefit scheme to a defined contribution pension, but you could lose valuable benefits and you'll have to receive appropriate independent advice first.
Go further: Final salary pension schemes - understand how these pensions work
If you do decide to move your final salary pension to your new employer's pension scheme, the amount you get to invest is known as the 'cash equivalent transfer value', which is calculated by your old scheme.
You must then invest this 'cash equivalent transfer value' in either a pension scheme with another employer, a personal pension, a stakeholder pension or a buy-out contract.
Go further: Personal pensions explained - understand more about these types of pension schemes
Final salary scheme incentives to transfer
Your DB scheme provider might offer you a financial incentive to transfer out of the scheme. Usually the reason for this is the expense of the scheme to administer by your employer, and they want to save some money.
You’ll be offered two types of incentive:
- Enhancement to the 'cash equivalent transfer value'. This means an increase to your transfer value, which you then transfer as a whole to another scheme.
- Cash payment. This is paid on top of your cash equivalent transfer value, but isn’t as attractive as it sounds – you may have to pay income tax and National Insurance on it, and you’ll get a lower pension when you do come to transfer your cash.
Should I transfer out of my defined contribution scheme?
This is far less problematic, because with a DC scheme, you accumulate an individual pension pot which you can simply invest this elsewhere when you move.
Be sure to read the Key Features Document that your new pension scheme provides you with, and ask any questions about the investments or charges before you transfer.
There are several factors to watch, however, which might make transferring unappealing:
Guaranteed annuity rate (GAR)
Some pension schemes guarantee you a certain annuity rate, sometimes as high as 15%. Before switching, check your pension for a guaranteed annuity rate and compare this with what you might achieve today.
Most workplace pension schemes will allow you to switch without charge, but some personal pensions have exit fees as high as 10%. Check carefully before making a move.
If you have several pensions locked in the schemes of previous employers, you might decide to take a more active control of your investments and pool them all in a self-invested personal pension (SIPP). A bigger pot may be advantageous from the point of charges, too, as they’ll only be levied on one pot.
Go further: Sipps explained - find out more about these types of pension
Check what charges you will face in the future. If you belong to a group personal pension (GPP), you might find that you’ve been enjoying an ‘active member discount’ while employed by your old firm. If this stops, annual charges could rise from around 0.5% to 1.5%.
Go further: Are fund charges eating into your returns? - get to grips with charges and how they erode your growth
Pension liberation scams
While cash incentives are acceptable, you should watch out for pension liberation fraud. This is when fraudsters contact you offering to transfer your pension savings to an arrangement that lets you access them before age 55 (the minimum pension age).
However, accessing pension savings before age 55 is impossible unless the circumstances are exceptional, such as terminal illness. The Pensions Regulator has warned that anyone using such a scheme to try and circumvent UK restrictions will face a tax liability that could be as high as 55%.
- Introduction to personal pensions - Learn more about your options
- Should I consolidate my pensions? - How charges and transferring your pensions works
- The Which? Money Helpline - Get expert help with your workplace scheme
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