How transferring pensions works

Understanding your pension plan is an important part of preparing for your financial future. Surveys show that six out of ten people save less than they could, because they find the pension system confusing. One element that’s useful to understand is how pension funds are transferred from scheme to scheme.

Employers typically arrange workplace pensions that employees can contribute to while in that job. This is separate from the state pension, which is a fixed amount paid by the government, based on your National Insurance contributions. There are also personal pensions which will be managed on your behalf, which are often used by self-employed or freelance workers. It’s also possible to manage your own personal pension fund through a Self-Invested Personal Pension (SIPP). This is less common as it requires detailed knowledge of investing and financial management.

When would you transfer a pension?

Reasons you might want to transfer a pension include moving to a new job, combining different funds into one or perhaps because you’re moving abroad.

If you have a workplace pension scheme, your contributions will continue to be invested, even after you leave a job and stop contributing. The value will continue to grow until the point at which you can start withdrawing the money. So, if you have had several different jobs, you may be part of several different pension schemes.

Consolidating these pensions into one scheme is an option that some people might wish to take. This could be for administrative reasons, so they only have to keep track of one scheme and less paperwork. It could also be because have joined a scheme that they think will give a bigger return on their contributions.

How do you transfer a pension from one scheme to another?

A pension scheme is not obliged to accept a transfer from another scheme, so it’s important to speak to the receiving scheme to see how things stand. If it’s allowed, then it should be possible to transfer the value up until twelve months before retirement. What happens next will depend on the type of pension.

A defined benefits pension, also known as a ‘final salary’ pension, is a scheme where the final amount paid out is agreed ahead of time. In this case the administrator of the pension scheme will first calculate the Cash Equivalent Transfer Value (CETV). This is an estimation of how much value will need to be transferred to generate the agreed benefits.

Transferring out of a defined benefits pension can be a risk as it means giving up a guaranteed income. The Financial Conduct Authority (FCA) has warned against doing this without the proper checks. Reasons to transfer out include wanting to take a lump-sum or to pass the pension onto a relative or another beneficiary. It’s important to get independent financial advice before taking this decision, to understand all the potential risks.

When transferring a defined contribution pension, the value depends on how much is paid in and how well the funds are invested up until the pension is paid out.

The actual process of transferring the value involves some form of written application, to notify the pension administrator that a transfer is being requested. In some cases, there may be an administration fee involved or the loss of some rights or privileges associated with the scheme. It’s important to get advice from both the existing and new pension provider, to understand all the implications of transferring a pension.

Transferring a pension abroad

It is possible to transfer a pension if you’re living or working overseas, but there are stipulations on the schemes that qualify. HM Revenue & Customs has a list of schemes that they recognise, which are called a Qualifying Recognised Overseas Pension Scheme (QROPS). There is a list of approved QROPS on the government website.

Transferring a pension abroad from the UK works in a similar way to transferring a pension from one UK-based scheme to another. The main difference is that you will most likely have to pay tax on the value that is transferred.

Further information on transferring pensions

Pensions can be complicated, so it’s definitely a good idea to get independent advice before you make any decisions. The Pensions Advisory Service offers impartial advice through their website, on the phone or via webchat.

There’s also a dedicated government service called Pension Wise which allows people over the age of 50 to book a free appointment with a pension specialist.

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