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Published 19 February 2021

Pension Transfers: What are They and How Do They Work?

When you bring all of your pension pots to one provider, that's a pension transfer. Learn what you need to know about the risks.

There are any number of reasons you may be considering a pension transfer. No matter yours, it is a big decision and can have very serious consequences if you get it wrong. Read on to find out what a pension transfer entails, what to consider before a transfer and when you should avoid it.

What is a pension transfer?

A pension transfer is when you move your pension from one provider to another. You could decide to do this for several reasons:

If you are thinking about transferring a defined benefit pension, there are risks to your long-term financial health involved, and for this reason you may be required to seek advice first.

What to consider before a pension transfer

There is a lot to think about before you make a pension transfer. It is a big move and it can result in a tax charge or the loss of valuable benefits if you get it wrong. Here’s what you need to think about.

Does your scheme allow transfers?

Check with your current pension provider to make sure you are allowed to transfer your pension to another company.

Will you lose any benefits if you transfer?

Make sure you won’t lose anything if you transfer. For example, some pensions come with a guaranteed annuity rate which could be invaluable in retirement, but you would lose it if you transferred. With a defined benefit scheme you will be giving up a guaranteed income for life.

Will you pay fees to transfer?

Read your current pension provider’s information to see if you will have to pay any early exit fees if you transfer your pension. You may well be charged a transfer fee, too, that can run into the thousands of pounds if you have a large pot. Make sure you know what your transfer will cost before you start the process.

Does the new scheme change the age you can take your pension?

Your current pension might have a ‘protected pension age’ which allows you to access your pension early.

Getting advice before a pension transfer

If you want to transfer a defined benefit pension, and you have a transfer value of £30,000 or more, you are required by law to get independent financial advice first.

Transferring any pension is a big decision. Although you are not required by law to seek advice before transferring a defined contribution pension, an Independent Financial Adviser can help you understand the pros and cons of moving your pension taking into account your personal circumstances.

» MORE: Everything you need to know about pension advice

How to transfer a pension

The first step is to request a pension transfer value, or cash equivalent transfer value, from your current provider. This will show your pension transfer value, details of any benefits you have built up in your current scheme and any information your new scheme will need.

You may then need to fill out additional forms to start the transfer process. Your current provider should then liaise with the firm you want to transfer your pension to.

What is pension transfer value?

If you are transferring a personal pension, SIPP or any other type of defined contribution pension, the pension transfer value is what the funds in your pension are currently worth. This value isn’t guaranteed – it could change depending on market movements between you getting your value and transferring your pension.

With a defined benefit pension you will get a cash equivalent transfer value from your provider. This is the amount your pension scheme will give you when you cash it in, which you could then invest in a more flexible defined contribution pension. However, there is no guarantee you will be able to generate the same level of income you would have had with the defined benefit scheme. You could end up worse off in the long run.

Watch out for pension transfer scams

Pension scams are, unfortunately, quite common. Most involve criminals convincing people to transfer their pension into high-risk investments where they take a hefty fee and leave the victim’s money in inappropriate investments, or they simply steal the money.

Not only could you lose some or all of your pension to the scam, you could face a big tax bill if the scam has meant you breached HMRC’s rules on pension withdrawals.

If you are unexpectedly contacted and offered a free pension review or the chance to make big returns on your pension, be very wary. The FCA’s Scam Smart website has a tool to help worried consumers spot pension and investment scams.

Image source: Getty Images

About the Author

Ruth Jackson-Kirby

Ruth is a freelance journalist with 15 years of experience writing for national newspapers, magazines and websites. Specialising in savings, investments, pensions and property.

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