Pension transfers explained Pension transfer pitfalls

Pension transfers disadvantages

Switching pension fund provider could cost you thousands if done the wrong way

Choosing the wrong way to switch pension fund provider could cause irreparable damage to your retirement plans. 

You could lose valuable benefits, such as high guaranteed annuity rates and bonuses, or be hit with huge exit penalties. 

If you’re looking for switching advice, it’s vital to choose an independent financial adviser (IFA) with specialist pension qualifications.

This guide explains some of the risks involved in pension transfers.

What are the risks when transferring my pension?

Switching without taking independent, specialist advice could mean you lose more than the extra cost of commission and management fees:

  • Exit penalties: If there are any exit penalties on your existing policy, they could cancel out the benefit of transferring to a new provider.
  • Loss of benefits: Your existing pension fund may include valuable benefits such as guaranteed annuity rates at retirement.
  • Transfer of risk: If you’re thinking of transferring from a final salary scheme to a personal pension, the investment risk switches from your employer to you, as could the scheme charges.
  • Reduced transfer value: If you're in a final salary scheme that's under-funded, the transfer value you are offered may be reduced.
  • With profits: Some providers, including Aviva, choose their with-profits fund as the default option. If you switch to another provider, you could be hit with a market value reduction (MVR). Prudential and Scottish Widows currently impose an MVR on some products.
  • Changing your mind: Pension transfers usually offer a 30-day cancellation period. However, if you're thinking of cancelling, make sure your old pension scheme will take your money back – many won't.
  • Tax-free cash: If you are switching from a fund offering protected tax-free cash of over 25%, you could lose this protection if you switch provider and add to the new fund.
  • Lost bonuses: Some pension companies pay large bonuses when you finally hit your retirement date. If you have a scheme that pays these, you could miss out on a big boost to your pension by transferring away.

More on this... 

Last updated:

March 2016

Updated by:

Paul Davies


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