The Retirement Game - Pension Transfer
- BetterAskAdam.com
- Feb 3, 2024
- 5 min read
We each have 11 jobs in our career, on average. Each job can have a pension - some so many years ago that you have quite forgotten about them and this could lead to 50 million dormant and lost pension pots by 2050.[1]
Faced with umpteen pensions to keep track of, lots of people feel it would be far better top transfer all the different pensions into one single pot.
Administratively there is a huge appeal to this tidy approach to one's finances - but if this is something you are considering, there are a number of important things to think about before you do it.
Jargon Buster:
Two phrases you will hear are:
Defined Contribution (DC) Schemes are those where the value of the pension is dependant on how much you out in - the contribution - and the performance of the find minus the charges they make.
Defined Benefit Schemes (DB) guarantee you a certain pension value. Because these are usually a very beneficial thing to have but cost the provider a fortune, they have become quite rare.
Questions & Answers
Can I Transfer My Pensions Into A Single Pot?
For most DC scheme, you are able to transfer your various pensions to a single pension from a provider of your choice. The bigger question, is should you?
Should I Transfer My Pensions?
Although you can transfer most types of DC pensions you can lose out on some benefits by doing so. So it is worth checking if there are any adde extras - that disappear once you transfer your pension pot.
Even if you are certain in your own mind that you want to transfer your pension, you may not be allowed to, until you have taken formal financial advice. If your pension is worth more than £30,000 and has a guarantee about how much you'll be paid when you retire, you must get financial advice before you make a pension transfer. Without this, the financial regulator does not allow the transfer to take place.
In most circumstances it is not advisable to transfer a Defined Benefit pension to a Defined Contribution pension.
Will I Make More By Transferring?
There’s no guarantee that transferring or combining your pensions will give a higher income or bigger pension pot when you retire. However, you may feel that you are either being charged too much in your current pension or that the fund itself is not performing well. In which case, there might be an argument that transferring the pension might lead to higher returns.
Smaller Pension Pots
If you have 'small pots' of less than £10,000 it can sometimes be beneficial to keep them separate. For example, it can give some flexibility to take money from them in the future without triggering other restrictions.
Why Might It Be Helpful To Transfer A DB Scheme?
Although usually a DB pension is likely to provide you a relatively good return, in some cases transferring to what is likely to be a riskier scheme, can have advantages.
A DB pension is quite inflexible. For example, unlike a defined contribution (DC) pension, you can’t take out more money in the early years before you receive your state pension and then reduce it when you do.
You also can’t withdraw more than your annual pension from a DB scheme to pay for debts, like your mortgage.
Most pensions allow you to withdraw up to 25% in the form of tax-free cash. You might be able to draw a larger tax-free cash lump sum from a DC pension than from a DB pension. That might happen because the way the tax free lump sum is calculated is different and more complex in a DB scheme. For instance a DB scheme rules might stipulate that for every £1 of pension given up the member can take £15 of TFC. The precise terms will vary from scheme to scheme and depend on market conditions and the member's age when the tax free cash is paid. Some DB schemes (generally public sector schemes) provide a defined level of tax free cash of, such as 3/80ths of salary for each year of scheme membership. Taking tax free cash in this way would not reduce the member's pension.[3]
One of the advantages of a DB pension is that it lasts as long as you do. But if you have think you have a reduced life expectancy, transferring out of your DB pension could be appealing. That's because the value offered for your DB pension should reflect the average life expectancy.
What Happens To My Pension When I Die?
You can’t leave pension savings in your will, so if you die before taking your pension, the pension provider has to decide what to do with it. An ‘expression of wish and nomination form’ tells your pension provider who should receive your pension savings if you die before you retire. It is not legally binding on the provider, but they will take your wishes into account when deciding who to pay your pension out to. You should make sure you ask if you need to re-fresh this form, every few years, to prove to the pension provider that these are your current wishes and are not out of date.
If you die, what happens to your pension varies depending on a number of factors. It's not that straight forward although on the other hand - the general principled aren't too maddeningly complex.
Here are some rules of thumb:
Defined Contribution Schemes
If you die BEFORE you turn 75:
If you HAVEN'T started taking your pension, the recipient usually won't be liable for any tax on it (as long as the pension is paid within two years of your death). Your beneficiaries can choose how to receive your pension – as a lump sum, drawdown, or via an annuity.
If you've taken some money out of the scheme (usually in something called drawdown), your beneficiaries can generally have whatever's left in your pension entirely tax-free, either as a series of payments, a lump sum or buy an annuity which will pay them a regular sum they die.
If you've already started receiving income from an annuity before you die, this usually stops when you die and can't be passed on.
If you die AFTER you turn 75,
Your beneficiaries usually pay tax at their normal rate on anything drawn from the pension. It doesn't matter whether you've started taking your pension or not
Defined Benefit Schemes
If you die BEFORE you start taking your pension:
If you're under 75, your pension may pay out a lump sum to a dependant. This payment will usually be tax-free for your beneficiaries.
If you're 75 or older, your pension may pay out a lump sum to a dependant but your beneficiaries will pay tax on it.
If you die AFTER you start taking your pension:
Generally final salary scheme will continue to paid a dependant of the person who died, but details do vary from scheme to scheme about who qualifies as a dependent. The income is taxed at the beneficiary's income tax rate.[4]
Sources:
