Company pensions explained Transferring your company pension
If you leave your employer before reaching normal retirement age, you can either leave your pension savings invested or transfer them into another scheme. There are pros and cons to consider carefully before making any move.
If you belong to a defined benefit (DB) pension scheme
The scheme guarantees to pay you a pension based on your final salary and the number of years you have belonged to it.
If you leave the money invested, it will eventually pay out on the same basis, with your leaving salary increased to keep pace with the rate of inflation.
Transferring out of a defined benefit (DB) scheme means that you surrender a promised payment for the prospect of an investment-linked lump sum. The amount you get to invest in a new scheme is a transfer value (known as the cash equivalent transfer value - CETV) put on your savings by the ceding scheme’s actuaries.
Because you're taking on investment risk and giving up a ‘pension promise’ underwritten by the old scheme, switching out of a DB scheme into a DC scheme is generally not advised.
If you belong to a defined contribution (DC) pension scheme
Transferring from an occupational defined contribution (DC) pension or personal pension is far less problematic, as you have accumulated an individual pension pot and can simply invest this elsewhere when you move.
There are several factors to watch, however, which might make transferring unappealing:
- Guaranteed annuity rate (GAR): some pension schemes specify a guaranteed annuity rate. As average rates have fallen considerably in recent years (from 15% in the early 1990s to 6% in the late 2000s), you could lose out by giving this up. Before switching, check your pension for a GAR and compare this to what you might achieve today.
- Exit charges: most occupational 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.
- Investment options: the new scheme might not have the same fund choices that your old scheme offered. Are you happy with what it offers? Conversely, a wider range of investment options might be the reason you decide to transfer. If you have several ‘preserved 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). Combining pension pots also makes it easier to keep an eye on your investments. A bigger pot may be advantageous from the point of charges, too.
- Annual charges: check what charges your current scheme is making and 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%.