Pensions can be complicated. While the question: “Can you transfer your pension to another provider?” has a clear-cut answer, it will lead to a complicated path of terms and conditions you have to understand. To add even more to this, if you have a pension either through your employer, or one held privately, you can transfer this to another provider. We’ll keep this complicated process straightforward for you to understand in the next sections, but if you want to know how to transfer a pension to another provider you might want to speak to us, we’re the experts.
As defined by the Financial Conduct Authority:
A pension transfer is a transaction resulting from the decision of a client who is an individual:
- To transfer deferred benefits from:
- An occupation pension scheme
- An individual pension contract providing fixed or guaranteed benefits that replaced similar benefits under a defined benefit pension scheme
- Or a stakeholder pension
- A stakeholder pension scheme
- A personal pension schemes
- A defined benefit contribution scheme
Two Types of pensions that are relevant here:
Type one; Defined Contribution Pension
A defined contribution (DC) pension scheme can effectively be understood by the following points:
- This is a pension that is built up using yours (and your employers – if applicable) contributions
- The amount of the pension pot depends on money that has been paid into the pension, the investment return and the choices made on retirement
- Unlike DB pensions, these do not provide a fixed guaranteed income on retirement
If you are considering transferring a defined contribution scheme, then here are two things you need to do:
- Request a Valuation
You will need to understand / request a formal pension transfer value from the pension provider or the scheme administrator.
2. Seek professional advice:
To make sure that this is fully favourable, you should seek the advice of a financial adviser.
Type two; Final Salary Pension
A Final Salary Pension Scheme is a type of Defined benefit (DB) scheme.
Essentially, a Final Salary pension scheme will provide the member of a scheme a set guaranteed income for life. Final Salary pensions are in decline, but many individuals in the UK still hold them. According to research by the ONS, 1.3 Million people are actively contributing to DB pensions and 11.8 Million people have a DB pension they will be able to claim in the future. Final salary pensions are expensive to administer and leaves employers with long term financial commitments. We have seen employers in recent years offer generous transfer values to mitigate against their long-term commitment of running the schemes.
There are two categories types of DB pensions:
- The most common is a final salary scheme, which is calculated and based on how much you are paid when you come to retire.
- Career average schemes as based on an average of salary across the service to the scheme or career
If you are considering transferring a final salary scheme, then here are two things you need to do:
- A ‘Cash Equivalent Transfer Value’ (CETV)
You will need to request a CETV. this is usually requested from your employer or the scheme directly. A CETV (Cash Equivalent Transfer Value) is the cash value placed on your Defined benefit (also known as a final salary pension) pension pot at a specific time. The amount of the CETV is essentially the amount available to transfer to an alternative plan in substitute for ‘the rights’ / Income under the scheme.
- Seek professional advice:
It is a requirement to seek financial advice (unless the size of the CETV is under £30,000) when making a Transfer of this nature, and it is a decision not taken lightly, so find a professional!
Why may I consider transferring my pension?
Effectively, transferring your pension pot, whether Final salary of Defined contribution, may have its advantages, these are the 8 areas that may be attractive:
- More Flexibility: Due to changes in pension laws, from April 2015, you were permitted to transfer from a private defined benefit scheme to a defined contribution scheme. This has created more flexibility; you can withdraw as much and as little as you want through income drawdown rather than purchasing an annuity.
- Inheritance Tax Benefits: recent legislation has seen the removal of the 55% tax on the remaining pension pot. Under current rules, if you die under 75, your pension pot can be inherited tax free. If you day over 75, there will be a tax on the pension at the inheritors personal tax rate.
- Easier overall administration through Consolidation: this is effectively bringing multiple pension saving pots into one. This makes affairs easier to administer and saves time in the process.
- More investment choice: some providers will have limited investment choice with comparison to others. Transferring to another provider may give you more investment choice which may in turn, suit you better.
- Current scheme is shutting down: it is not uncommon for pension schemes to shut down, and therefore, you will have to select a new provider to look after your pension if you want to continue with one.
- Moving abroad: you may decide to move abroad to a scheme within that new country for various reasons.
- An increased CETV: Employers are looking to reduce their long-term commitment on final salary pensions and therefore offering a very generous transfer offer (CETV) for those that transfer out of the scheme. This may make it more lucrative and attractive to transfer out.
- Lower potential charges: different providers have a different approach in terms of their fees and charges. You may find that another provider is more favourable in terms of charges on your pension pot. Maintaining your pension pot through that provider will be cheaper, saving you money long term with more savings for retirement than for fees & charges.
Why transferring my pension may not be right for me?
The below points may be the decision between transferring your pension savings to another provider or staying put. Once you have considered these points, it will be imperative to speak with your financial adviser to help you make an informed decision.
- Loss of valuable benefits: If you are concerned about losing out on benefits such as; guaranteed income for life, index linking, life cover or a dependents’ pension.
- Guaranteed annuity: If your current provider offers a guaranteed annuity option which may be considerably higher than the available open market rates.
- Exit charges or charges: If your current provider / scheme will apply a significant charge or exit penalty.
- Limited investment: if you are moving into a more complex option, one that is limited, risky or requires appointing a financial adviser and therefore increasing the charges you will pay to maintain your pension savings pot.
What are the different Types of pension transfers?
Here we will cover the following three types of pension transfers:
Transferring into a SIPP:
A self-invested personal pension scheme is another form of ‘defined contribution’ personal pension. The value is based on the amount you pay in and how your investments perform. The main difference with a self-invested personal pension and a stakeholder pension is the ability to have more flexibility on your choice of investments within your pension. A self-invested personal pension is more tailored towards individuals that are happy to make their own investments decisions or choose someone to do this on their behalf. We have specialist fund managers that we work with and Qualified Financial Advisers that can tailor make your pension to set you sail for the future, so contact the team here at Black Lion Wealth for some expert, jargon-free advice.
Essentially, you can transfer an occupation pension, or work pension to a personal pension or a SIPP or a new employers occupational pension providing the scheme allows this.
Can I transfer my pension to another country?
As stated above, you might be considering transferring your UK pension if you are moving abroad. To answer the question, you can transfer your pension savings to a pension scheme in another country.
You have to keep in mind, however, that the transfer scheme your pension will move to falls under the qualifying recognised overseas pension scheme (QROPS). Your current UK pension scheme may refuse the transfer or pay up to 40% tax for the transfer if said transfer scheme does not qualify as a QROPS.
To make sure this process goes smoothly, it is advised that you check with the overseas scheme or your UK provider or adviser.
The location your QROPS is based in is also a consideration on whether or not you will have to pay tax. However, if the QROPS you will transfer to is provided by your employer, you will not need to pay tax, but it is right to check to make sure.
If you live outside of the UK, Gibraltar, or the European Economic Union, or you’re planning to move to the aforementioned areas within five years, you will have to pay 25% tax.
On the other hand, you can get the tax refunded if you move to the countries mentioned within five years of the transfer. To claim, you should notify both your UK scheme provider and your overseas manager that you have moved using the form APSS 241.
Once the form is completed, they will refund the tax from the pension it was taken from.
Conversely, if you move to the country your QROPS is based in, you will not have to pay tax. Do note that this will only apply if your QROPS is based outside the UK, Gibraltar, or the EEU, otherwise, you will have to pay 25% tax.
Additionally, if you plan to move to different countries within five years of the transfer, you need to fill out the form APSS 241 and give it to your scheme administrator. By doing so, you will get a refund if you move to the country your QROPS is based in, or you’ll need to pay 25% tax if you move away.
Can I transfer my pension into property?
You can transfer your pension into a property. However, there are some exceptions that depend on the type of property you are interested in purchasing.
While the prospect of purchasing a home or any residential property with your pension is possible, you will be hit by a sizable amount of tax by the HMRC should you decide to proceed.
It is also not a financially viable decision to purchase a house that you plan to rent out because buy-to-let properties are also covered by a taxable bill.
Also, going this route will make the property part of your estate, which means it will be subject to inheritance taxes after you have passed on, and any gains from this investment will also be taxed.
The most financially viable route would be to purchase commercial properties with your pension since it includes tax benefits.
There are potential benefits from capital appreciation, as well as income generated from rent. You might avoid paying the capital gains tax, should you decide to sell the property as well.
In addition, if you hold the property within your SIPP, you don’t have to pay the tax that the property may generate.
This is why business owners who are renting choose to purchase the property they do business in. Their income not only helps them pay the mortgage but it also helps their pension prosper and grow.
The value of Investments is not guaranteed and can fall as well as rise and you may not retain the amount you originally invested.
If you drawdown too much Income or your investments underperform, you run the risk of running out of funds.
The value of pensions and the income they produce can fall as well as rise, you may get back less than you invested.
Transferring out of a final salary pension is unlikely to be in the best interests of most people.
The Financial Conduct Authority do not regulate inheritance tax planning and trusts.
Both Black Lion Insurance & Black Lion Wealth are Trading Styles of PRG Protect Ltd
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