Should I transfer my pension? The benefits and drawbacks

Transferring pensions simplifies administration. Managing one pension is easier than handling multiple statements and paperwork.

With the introduction of pensions auto enrollment, many people find themselves with multiple pension plans. You could have a new pension even if you worked for a company for as little as three months. Such pensions may also be transacted completely online with no physical documentation, making them easy to lose track of.

With one plan, record-keeping becomes simpler. This is particularly useful if you want to make a large, one-off contribution and to make use of your pension carry forward allowance. Pension carry forward allows you to pay in and earn tax relief on up to £220,000, using any unused pensions annual allowance (currently 100% of your relevant UK earnings or £60,000 – whichever amount is lower) going back three tax years. Provided you were a member of a registered pension scheme in the three previous tax years then you can take advantage of this allowance (whether or not you paid any contributions into it).

Monitoring one pension's performance is simpler than tracking many. Different providers report performance at different times, making it hard to keep track. Transferring pensions into one helps you manage underlying investments more effectively.

Different pension providers offer different strategies - some might have 10 options while others might have many more to choose from. Many schemes, especially workplace ones, provide a ‘default’ investment strategy if you do not make your own choice. However, these default funds may not be appropriate for you and your circumstances. You need to understand your personal attitude to taking risk, then see what the right investment option is and transfer your pension into the right strategy if appropriate.

Contrary to misconceptions, transferring pensions can enhance investment diversity. Many clients find their pensions are not diversified because they remain in the previously mentioned default funds with each pension provider. One provider with a good selection of funds can offer a range of investments within one plan.

Transferring pensions can offer greater choice and flexibility. Older schemes may lack the flexible options introduced by Pension Freedoms in 2015, such as income drawdown and flexible death benefits, which allows access to pension savings from age 55 (increasing to 57 in 2028).

It’s important to bear in mind that freedoms mean that you have to manage your investments carefully so you don’t run out of money during the course of your retirement. If you withdraw too much or your investments don’t perform as expected, you could leave yourself financially vulnerable in later life.

Transferring pensions may reduce charges, as you pay for one set of fees. Some schemes offer discounts when the fund value exceeds a certain amount, which may not apply if contributions are spread across different providers. Many modern pensions offer a flat fee, rather than the traditional percentage-based fee, which can be uncapped. Selecting a low-cost pension could save thousands of pounds over your working lifetime.

The cost of transferring pensions varies. To assess the trade-off between exit fees and pension charges, compare five years' worth of charges on the new plan against exit charges from all plans. Long-term savings may outweigh short-term penalties.

A cheaper pension scheme isn't always better. Assess the cost, benefits and suitability of your current structure. Sometimes, paying more ensures your pension is aligned to your financial goals.

Transferring pensions may result in losing existing benefits, such as higher tax-free cash or guaranteed annuity rates.

Some old legacy schemes offer scheme-protected tax-free cash, linked to workplace pensions and your salary at the time. Despite changes in 2006 for more flexibility, some policies still allow more than 25% tax-free cash, with some offering up to 97%. In these cases, the advice could be to diversify the funds according to your risk attitude but not to move them. Upon retirement, you can take the cash out without paying income tax on most of the pension pot, though the tax-free cash must be taken all at once.

Many older schemes from the 1980s and 90s offer guaranteed annuity rates. Some people consider transferring these pensions due to perceived low value, but we've found very high annuity rates, sometimes as high as 11% or 12%. Even with a pension value of just £40,000-50,000, the income offered is substantial. In these cases, it could be advisable to keep these plans until maturity to benefit from the guaranteed income. Prevailing tax rates and reliefs depend on your individual circumstances and are subject to change.

Defined benefit pension schemes, or as they are more commonly known, final salary pension schemes offer valuable guarantees and are based on your length of service and earnings within that employment period. The Financial Conduct Authority (FCA) states that the default position is transferring a defined benefit scheme is unsuitable.

Defined contribution schemes, or money purchase occupational pension schemes, are based on the contributions that you and/or your employer pay in to the pension plan, along with investment growth achieved from the underlying funds. They offer specific advantages, such as a tax-free lump sum and most importantly, guaranteed income.

Professional financial advice is mandatory for transfers exceeding £30,000 to ensure you understand the potential benefits and drawbacks.

If the pension you are looking to transfer is an employer-related plan, check if your employer will stop paying in benefits if it is transferred elsewhere.

When considering pensions overall, it’s essential to always bear in mind that pensions are a form of investing. The value of an investment, and the income from it, may go down as well as up and you may get back less than you originally invested.

We can help you to decide whether or not transferring your pension is the right choice for you. If you have any questions or would like to discuss your own situation, speak to your usual Evelyn Partners contact or book an appointment online.