Pension transfer: Is it a good idea? - Times Money Mentor (2024)

There are lots of reasons why it might be worth transferring your pension to another provider. We explain how pension transfers work and outline the pros and cons.

A pension transfer could potentially save you thousands on fees over the course of your retirement, but there are downsides too, particularly if you’re giving up valuable benefits.

In this guide, we outline the pros and cons of transferring your pension.

We explain:

• Pension transfer: the pros and cons
• How do I transfer my pension?
• How long does a pension transfer take?
• Can I transfer my pension myself?
• Is a pension transfer expensive?
• Can I transfer my pension to my bank account?
• What is a pension transfer value?

Read more: Best ready-made personal pensions

Pension transfer: the pros and cons

There are lots of good reasons to consider making a transfer.

What are the advantages of transferring my pension?

One of the most important reasons to consider transferring is the fee you pay. All providers will charge an annual fee for managing your pension, but some will charge more than others.

Tom Selby, an expert at AJ Bell, said that even a small difference in fees could have a dramatic impact on your overall retirement savings.

Say someone contributing £2,000 a year into a pension but paying a fee of 1.5%. They could find they are £15,000 worse off after 30 years than a person making identical contributions who is paying a fee of 0.75%, he said.

“The more you save in a pension, the bigger impact charge differences could have on your fund value,” he added.

Read more: A simple guide to pensions

Savers should check the fee they are paying, and act if it is higher than it needs to be. Selby said older pension schemes often charge more than modern ones.

Another reason to transfer could be to get greater control over your investments. Different providers have different ranges of fund options, from free choice across the market to a small number of prepackaged funds.

Better choice will also mean spending time and effort researching the best options, so it may not be for everyone, but for those who want complete control over their savings, this could be a reason to move their money.

Becky O’Connor, of the provider PensionBee, said savers are becoming increasingly keen to align their savings with their values on things like climate change.

“People are motivated to switch pensions because they want their plan to exclude fossil fuels or be invested in companies having a positive impact,” she explained. “This shift is interestingly not isolated to younger pension savers, as you might expect, but is evident right across the age ranges.”

Finally, some savers may want to switch to get more flexibility over withdrawals. Different schemes have different processes when it comes to taking payments from a pension and savers should check to see which suits them.

Most people are allowed to start taking money from their pension from the age of 55, and the first 25% of withdrawals can be taken tax-free.

However, some pension providers levy a charge for cashing in retirement savings, while others don’t. Savers should make sure they know what approach their existing provider will take at that point – and, if this is important to them – research other providers.

Read more: Are you ready for retirement?

What are the risks of transferring my pension?

There might be some pitfalls to transferring your pension too.

Although most pension firms don’t impose exit fees, a small number do.

Of course, the costs of leaving could be outweighed by potentially lower fees or better investment growth in future. But it pays to read the small print.

You should also be careful about any benefits specific to a pension provider that you might forgo by transferring out.

O’Connor said: “Even some defined contribution pensions can have some guaranteed elements or benefits, so it is important that you understand what you might be giving up as well as what you might be getting from a new provider.”

She also pointed out that most people in workplace schemes whose employer is still making contributions to their pension would likely be best served by staying put. This is because those contributions could be valuable.

Another, and potentially the biggest, potential risk is that of pension liberation scams. These frauds are on the rise — with a 45% increase in 2021 — and they can be devastating.

Selby said: “Make absolutely sure the firm you are trusting with your money is a bona fide, regulated pension provider and not a fraudster trying to steal your hard-earned retirement pot.”

Also look out for any costs to set up a new pension with another provider. While it could still be worth transferring, just make sure you’re making an informed decision before you make the switch.

Read more: How much should I pay into my pension?

How do I transfer my pension?

If you want to change to another British scheme, you first need to make sure you understand the terms and conditions of a transfer, including any exit fees.

You should speak to your pension provider and ask them to send you documents with details of any exit fees and the transfer value.

Then contact the provider you want to switch to and make sure that it will accept the transfer. If so, it will give you an application form to fill in – and most firms will handle the transfer on your behalf.

You may sometimes need to complete a paper form, although most providers now allow online transfers.

The government-approved MoneyHelper service can give you more advice.

Read more: What does a pension pot worth £37,000, £150,000 and £500,000 give you?

How long does a pension transfer take?

Last year it took an average of 14 days for companies to transfer a pension, according to Origo, the pension transfer service.

The length of time has increased by a third since 2020 when it took 10.7 days on average to move a pension.

There is a push by some in the industry to introduce a 10-day transfer rule to ensure switches are carried out quickly.

Some pension transfers take a lot longer than two weeks if providers rely heavily on paper forms. These can slow the process down compared to online forms.

If there are issues with the transfer then this can also slow the process down.

However, despite pension transfers taking longer on average compared to 2020, it could still pay off to switch providers.

Read more: Should I combine my pensions?

Can I transfer my pension myself?

You can usually authorise a pension transfer yourself and there is no requirement to get regulated financial advice before you do so.

In many cases, you can usually authorise a pension transfer yourself.

The only exception is if you are a member of a defined benefit, or “final salary”, workplace pension scheme worth at least £30,000. This type of scheme pays out a guaranteed income from the year you retire to the year you die.

If you choose to transfer out then you lose this guarantee.

This rule is designed to protect savers in these schemes to make sure they are fully aware of what they are giving up. But there is also a case for other people to take financial advice if they are dealing with potentially large amounts of money.

There could be benefits to this if you value the greater flexibility, but because this is a major decision it is a legal requirement to seek advice.

Read more: Best SIPP providers

Is a pension transfer expensive?

Transferring a pension does not usually cost anything.

While some providers still charge an exit fee, this is not very common.

The main cost to transferring is the time and effort involved in doing so, O’Connor said.

“But once you have provided the basic information required to make the transfer happen, it should largely be out of your hands and you can sit back and wait.”

Read more: Best pension drawdown

Can I transfer my pension to my bank account?

For most pension schemes, it is not possible to access your pension until you are at least 55.

You can, however, transfer to a new provider at any time.

But if you’re 55 or older, you can move your pension into your bank account.

Even then, though, it is unlikely to be a good idea to take all of your pension in one go. This is because it will prevent your pension from benefiting from investment growth.

Besides that, money in bank accounts is usually only protected up to the value of £85,000 in the event of the institution collapsing. Your pension is likely to be worth more than this.

Crystallising your pension in one go would also lead to it being treated as income for tax purposes. This could lead to a potentially much higher bill than you would have otherwise faced.

Read more: Best junior SIPP providers

What is a pension transfer value?

A pension transfer value is the amount that your pension is worth. For a defined contribution pot the value is based on the amount of money that has been paid in and how your investments have performed.

Be aware that it can move up and down as the value of the investments held in your pension is likely to change regularly.

However, working out the transfer value for a final salary scheme is more complicated. It’s not just based on how much you and your employer have contributed, but also factors such as life expectancy, the cost of living, and your age.

Transfer values can rise and fall depending on these factors. Bear in mind that your transfer value usually only lasts for three months.

O’Connor said: “Pension companies apply specific methodologies to work out what your defined benefit pension is worth if it is transferred into a defined contribution plan instead.

“The main thing to consider here is whether that value is high enough to compensate for the loss of guaranteed income that you would get if you left the money in the defined benefit scheme.”

While a transfer value for a final salary scheme might sound like a lot, it might not always be as good as it seems. This is because you might be giving up valuable benefits, such as a guaranteed income for life.

It’s important to think carefully before moving out of a final salary pension scheme. Even if your pension transfer value is less than £30,000, it might be a good idea to speak to a financial adviser.

Read more: Should I combine my pensions?