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Pension transfers
Many people have small pension pots that they have accrued over the years and other than the inconvenience of all the paperwork, it can be a very inefficient way to save for your retirement.
As new rules have come into effect, and especially in terms of Stakeholder pensions, many old plans have much higher charges than would be applied now, but as they were set up some time ago, the charges that you pay from your pension are those applicable at the time.
A pension transfer analysis is conducted by an IFA and assesses your current plans against what would be available today and a recommendation would be made either to transfer or to leave them where they are.
The process of analysis looks at all of the following areas;
Charging Structure
Firstly we review the charging structure of your current plan. This is done by asking your current provider for a projection to your retirement age, based on the current value in the plan and assuming that you make no further contributions if you are not currently contributing. We then produce an illustration from the proposed scheme using identical criteria.
If the existing plan has any transfer penalties applying, then the proposed scheme starts with the transfer value, not the current value.
As all pension companies are required to produce illustrations in the same way, any difference in the final fund value is normally attributable to the difference in charging structures of each plan
Guaranteed Annuity Rates
When the time comes for you to take an income from your pension it is achieved by the purchase of an annuity. This means that the lump sum that you have accrued is converted into an Annuity which will pay you out an income for the rest of your life. There are several options available when you purchase an annuity such as a spouse’s pension or a guarantee period in the event that you die shortly after converting your lump sum. The amount of the income is largely dependent on interest rates at the time you retire but lifestyle factors will also affect the amount.
Annuities can be purchased either from the provider of your pension or you may choose to purchase it from another provider who may offer you a better rate. This is known as the Open Market Option. Once an annuity is purchased then it cannot be changed so it is important to get it right first time!
Some providers offered Guaranteed Annuity Rates for a period of time which meant that they promised a certain annuity rate when you retire, irrespective of the rates available at the time. If the plan had a GAR that was set when interest rates were high then it is likely that it will provide you with a greater income than would otherwise be available. We therefore need to take this into account when recommending any possible transfer as the guarantee would be lost on transfer.
Death Benefits
If you die before you take your pension then the accrued fund is normally paid to your estate or a specific person if you have nominated them. Some plans include an enhanced death benefit that may not be available if you transfer it to a new plan.
Pension Term Assurance
Although it is not possible now, there was a time when you could take a life insurance plan with your pension that would be eligible for tax relief on the contributions. A transfer to another provider could jeopardise this benefit and in order to maintain the cover you would need to pay an increased premium as the tax relief would be removed.
Waiver of Premium
Some pensions offered the facility to add on a ‘waiver of premium’ policy. This was an insurance policy that incurred a monthly premium but meant that in the event of you being unable to work through illness or disability for a period of time would continue paying the premiums into your plan.
Options considered other than transfer
It may not always be so that a transfer is the best option as any problems may be solved my making amendments to your existing plan. We would also consider the following
Internal Fund Switching – Your existing provider will allow you to transfer the underlying funds to alternate ones within their range. This may help to rebalance your investment to better reflect your ‘attitude to investment risk’ and may also help investment performance if the new funds outperform your existing.
Reducing any contributions to the minimum allowable – This is useful if there is a charge applied to your current plan if you cease paying regular contributions. You could reduce your payments to the minimum allowed without penalty, or even cease altogether without actually transferring the plan, and continue payments into a new plan.
If you have an old or frozen pension plan then you should have it reviewed by the qualified experts.
You may be able to:
- Increase the value of your pension
- Unlock your pension
- Consolidate your plans
- Save £thousands in pension charges
- Access better performing funds
- Release tax free cash from your plan
- Receive an immediate income
