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The do's and dont's of pension transfers

time for a pensions change?

Advice from the Pension Service
New State retirement ages

Increasing numbers of people are switching their pensions. The reasons vary, with some looking for better fund performance and lower charges, and others having been made redundant.

Whatever the reason, if you're thinking of transferring a pension, it's important you first take expert advice. Before you do that, here are a few do's and don'ts.

What you should do

• Go to a specially licensed independent financial adviser.

• Demand a transfer value analysis. This is a computerised calculation which allows you to compare the benefits of your frozen pension with the alternatives. It also gives a critical yield (usually between 7-11 per cent), which indicates how fast an alternative scheme will have to grow to match the benefits in your old pension. If the critical yield is 8 per cent or less, then a transfer may be worth considering.

• Consider your retirement options. Are you intending to retire early? Check if the scheme to which you are switching has the flexibility to handle your requirements.

• Check on the financial position of your old scheme. If it is in surplus (it has more assets than pension liabilities) it may be advisable to stay with the scheme.

What you shouldn't do

• Don't switch from your existing occupational pension scheme into which both you and your employer are currently making contributions. No private pension scheme can match the benefits provided by your employer. A transfer should only be considered if you have left your employer.

• Don't transfer from a public sector pension scheme, such as the nurses' or the teachers' scheme, even if you left their employment several years ago.

These schemes are guaranteed against inflation no matter how much it rises in future. Unlike other schemes they also allow "linking" of different service years if someone returns to teaching or nursing after several years' absence. Some companies place a blanket ban on accepting transfers from these schemes, in the knowledge that the benefits cannot be matched.

• Don't ransfer from a pseudo-public sector scheme, such as the Mineworkers' or Water schemes. These offer extremely generous range of benefits which are difficult to match elsewhere.

• Don't transfer if you are averse to risk. Money placed in a personal pension will be subject to the rises - and falls - of the stock market, whereas a "defined benefit" final salary scheme offers guaranteed benefits.

• Don't transfer without checking the death benefits of the former scheme, which may not be matched in a personal pension without having to buy a life insurance policy.

• Don't transfer if you have just a small amount of money accrued in your former pension. It's only worthwhile considering a transfer if the amount is worth more than "10,000. The cost of a transfer is usually about 5 per cent of the total pension pot, paid out in commission to the adviser and charges by the pension provider.

• Don't transfer if your previous employer's scheme was money purchase, where your pension depends on the amount in your fund at retirement. These are effectively already a personal pension and a transfer to another personal pension is unlikely to be advisable.

• Don't switch if you are less than ten years to retirement, unless the benefits of income drawdown (avoiding low annuity rates by keeping your pension pot invested) outweigh the benefits of a secure payout.


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