Defined Contribution Transfer
A defined contribution pension transfer is the process of combining two or more pension pots into one. A lot of people want to know if they can transfer their defined contribution pension themselves…
Yes, you can transfer your defined contribution pension pots yourself without seeking financial advice. For small pots this may not have an impact on your financial position, but for larger pension investments, it’s always advised that you seek independent financial advice.
In this article we explain in great detail how you can transfer your pension, as well as the various methods for withdrawing your pension savings and the tax implications of each choice.
What is a defined contribution pension?
A defined contribution pension means you build up a fund that you can access after the age of 55 and use however you want (depending on what your scheme permits). A defined contribution pension may be either in an occupational (workplace pension) pension scheme or a personal pension scheme.
In a defined contribution (DC) pension, you invest funds to build up your pension savings. You can choose how you use your pot, to give you allowable tax-free lump sums and your retirement income.
There are certain situations when you may be able to access your pension pot early due to terminal illness or poor health.
How do I transfer my defined contribution pension?
There may be benefits to switching from one defined contribution scheme to another, but the benefits depend on your individual circumstances and it’s a complex financial decision. So you should first get impartial advice from a firm authorised to give advice on pension transfers.
Here is a step by step guide for transferring your defined contribution pension yourself:
1. Locate all your pensions
There are a number of paid services online that offer to trace your pension money for a premium, however, it is possible to trace your pension free of charge yourself, as long as you know the name of your previous employers.
Start by going to the pension tracing service located on the government website here: Pension Tracing Service to gather the contact details of all your previous pension providers.
Note down all the contact details for your personal and workplace pension providers.
2. Contact your previous pension providers
Using the template provided below, substitute each of the relevant fields, fill in the form and send one to each of your previous pension providers.
For compliance this is the letter.
Then gather all the replies in one place and once you’ve received them all move on to the next step.
3. Check for penalties associated with leaving your provider
If you wish to transfer an existing pension, the scheme rules will differ for each, first find out how much your current provider would charge you to move. Even if you have held money with a provider for many years and your funds have not performed well, you may still face penalties for transferring.
With-profits funds held with life companies, for example, might have transfer penalties and extra charges known as market value adjusters (MVAs) to make up for weak stock markets.
Here’s a list of exactly what you’re checking for:
Charge to transfer: Find out exactly how much your current provider would charge you to transfer pension schemes.
Exit penalties: Include all penalties associated with transferring your pension. Check for extra charges known as market value adjusters (MVAs) that are used by companies to make up for weak stock markets.
If there are any exit penalties on your existing policy, they could cancel out the benefit of transferring to a new provider.
Loss of guaranteed annuity rates (GARs): Your existing pension provider may include valuable benefits with your defined contribution pension pot such as a guaranteed annuity rate.
Lost bonuses: some providers offer bonuses to investors who stay with them (and make regular contributions). A new provider may not be able to match these offers, so be sure to check if they apply to your pension scheme.
Tax-free lump sums: Is access to your tax-free cash protected? You may lose the right you had to take a tax free lump sum of more than 25% of your pension value, on rules pre-dating 2006.
Safeguarded benefits – Some older defined contribution pensions have safeguarded benefits which are no longer available and would be lost if you transfer.
Changing your mind: Many pension providers offer a 30-day cancellation period on their pension schemes. However, if you cancel, you need to make sure that your previous pension scheme will take you back – some don’t.
As not all pension schemes are the same and the scheme rules differ, Here we’ve attached a helpful spreadsheet to help you track all of the penalties listed above.
If you are looking for a financial advisor in Newcastle or a Financial Advisor in Middlesbrough you can visit these links.
4. Decide on a new scheme that you’d like to transfer to.
An investment linked annuity guarantees income of a certain level, and the rest is linked to how your investment performs.
You choose your guaranteed level of income and part of your pension pot funds this. Then the rest of your pot is invested and pays extra money based on how well it’s doing. You would get a good income if the markets do well but might only get the minimum guaranteed income amount if the markets perform poorly.
Annuity or Drawdown
If you’re going to transfer your pension pot(s) it’s important to understand what you’re shopping for. Typically it’s one of two products:
- pension schemes that offer an annuity – guaranteed income. At Joslin Rhodes we call this ‘The Box’.
- Pension Schemes that offer Pension drawdown with the option to take tax free cash – flexible retirement income. We call that ‘The Barrel’.
Here you can find out more about ‘The Box and The Barrel’ in what is pension drawdown
Without doubt, you must shop around if you’re going to choose the best pension that will provide either a guaranteed income or a flexible retirement income – it’s worth mentioning that pension
drawdown schemes will often allow you to a tax free lump sum once or on a number of occasions without paying income tax.
The next thing to consider when choosing a pension provider is, what type of investment you’re looking for.
The market is diverse, so for illustration purposes, we’ve used Joslin Rhodes’ Plan Happy investment portfolio to give you an example of what you’ll be looking at, and for:
Joslin Rhodes Plan Happy Investment pathways:
|Recipe Name||Maximum likely fall out over any 12 month period||Maximum likely growth over any 12 month period||Average annual growth over the long term|
|Plan Happy 0||-2.7%||6.4%||1.8%|
|Plan Happy 10||-3%||6.9%||2.4%|
|Plan Happy 20||-3.3%||9.2%||3%|
|Plan Happy 30||-5.2%||12.3%||3.6%|
|Plan Happy 40||-7.4%||15.6%||4.1%|
|Plan Happy 50||-9.6%||19.2%||4.8%|
|Plan Happy 60||-11.9%||22.8%||5.5%|
|Plan Happy 70||-14.1%||26.6%||6.3%|
|Plan Happy 80||-16.2%||30.4%||7.1%|
|Plan Happy 90||-18.5%||34.2%||7.9%|
|Plan Happy 100||-20.1%||37.3%||8.6%|
The table above shows a range of Plan Happy portfolios from 0 to 100. The lower the number, the lower the risk that you’ll lose money, shown in the second column. And conversely, in the third column you the lower your opportunity for growth.
A lot of investment portfolios will be similar to this structure. They’ll have low, medium and high risk offerings. It’s up to you to decide on your appetite for risk based on your individual circumstances and choose the appropriate portfolio for you.
Typically people closer to retirement age will be risk averse with their retirement fund, so will take low yield safe investment options, compared with younger people who may have a bigger appetite for risk because of the potential upside.
We would strongly advise that you do seek independent financial advice when making decisions of this nature.
SIPP Vs Personal Pension
You may be considering a Self Invested Personal Pension (SIPP). The main differences between a SIPP and a personal pension are:
- The investment options: If you are looking to invest in single company shares, investment trusts, or investment funds that are not widely available, you will typically have a lot more choice in a SIPP. However it’s worth mentioning that most modern pension contracts can offer quite a wide choice of investments
- The way the fees are charged: Personal pensions typically charge a percentage fee for the product, where as, SIPP’s mostly have fixed fees, which can be beneficial if you make less transactions.
- The level of protection: Personal pensions are often managed by Life Insurance firms, and they are typically insured up to 100% under the FSCS scheme if the pension company becomes insolvent, but SIPPs are only covered up to £50,000 per firm.
How to shop around for the best pension
Your first port of call should be your existing provider, they may offer additional incentives to retain your funds.
After that, there are three main ways of shopping around for the best defined contribution schemes:
|Means of shopping||Pros||Cons|
|Independent Financial Advisor||Financial advisers will research the market and recommend the most suitable product for your needs and circumstances. |
They’ll handle all the paperwork
You may able to claim compensation if anything goes wrong
|Usually the most expensive option.|
|Pension Brokers||Usually cheaper than getting advice |
Many handle the paperwork
|most don’t offer advice |
If you make the wrong decision, there’s no going back on it
|Shop around yourself||The cheapest option||You’ll have to do all the paperwork |
It’s a complicated financial decision with a lot of variables. It would be very easy for something to go wrong.
Your options will be more limited as some pension providers require you to speak to a financial adviser before you can transfer to them.
When shopping around and considering where to put your pension money. Ask for the key facts document for each pension plan you are considering. This is a summary of all the important facts about the pension plan.
Calculate if it is worth moving
Once you have the transfer value from your existing provider and an idea of where you want to switch to, you can assess whether the move makes sense.
Here we’ve put together a useful list of fees and charges you’ll need to weigh up, they include:
- initial set-up fees
- administration charges
- platform charges
- investment charges
- trading fees.
- Missed payments
- Early withdrawal fees
Once you’ve checked the penalties for leaving and assessed whether the costs of transferring are beneficial then you’ll be in a better place to make an informed decision on whats best for you.
Ask your provider for a projection of benefits at retirement if you were to remain in the same funds. The new provider should be able to provide a comparison based on your new funds.
Request a transfer value
In step 2 you’ve requested the transfer value. Make a note of that in the ‘Initial transfer value’ column.
The transfer value could fluctuate before you decide to transfer your pension pot from one pension scheme to another. If there has been a significant period of time, two to three months, check with your pension provider exactly where you stand to make sure your calculations are as accurate as possible.
Make a note in the ‘Confirmed Transfer Value’ column so that you now have all the information you need to make a decision.
Apply for your new pension
Once you have decided which pension to open, the process should be straightforward. Some low-cost Sipp providers require you to go through an adviser, but others let you apply online.
You will have to complete an application form, which will include details of any funds you want to transfer. The new company will contact your old provider to request the transfer. Your existing company will issue discharge forms that you will have to sign.
Make the switch
Once your existing company has confirmation that you wish to transfer elsewhere, it should release the funds. Advisers say this process can be done in just a week or can drag on for months, depending on the provider. If you are moving from a closed life company, it could take longer and advisers suggest you keep chasing the company to move your money.
You have very little control over the precise day when the switch will take place so, if you are concerned about market timing, you could ask for your funds to be moved into cash in advance.
Reinvest your funds
Your funds will be deposited into your new scheme in cash and you will then have to move them into your chosen investments. You can do this in one go or invest over a period of time to smooth out market swings.
Can I transfer my defined contribution pension myself?
In most cases, you’ll be able to move your pension to another pension scheme without needing to get advice.
But some of the decisions you may have to make can be complex and it’s recommended that you consider getting regulated advice.
If you have what’s called ‘safeguarded benefits’, in particular if you have a guaranteed annuity rate and the value of these benefits is more than £30,000, you’ll have to get regulated financial advice before you can transfer.
If you’re at or approaching retirement age and want help understanding your financial circumstances, your investment decisions or how tax treatment would affect your pension.
We offer a free initial consultation, so you can be sure of the best way to transfer your pensions.
How do I withdraw my defined contribution pension?
From 55, under the pension freedom act 2015, you now have a number of choices when it comes to withdrawing your pension. These are:
- Pension Drawdown.
- Take your pensions as a number of lump sums.
- Take your whole pension in one go.
- A mixture of the above.
From 55, and sometimes earlier, your scheme administrator will send you a ‘Wake Up Pack’ – A gentle push to remind you to think about your pension options…
Here we go into the different withdrawal methods…
Before we do. One of the big questions people want to know the answer to, is… can I retire at 55?
Once you’ve answered the bigger questions about what you want to do at the various stages of your retirement, choosing the right withdrawal method for each stage will be a lot easier.
Annuities – Guaranteed income
The withdrawal here is essentially the buying process itself. You withdraw money from your pension pot and use it to buy an annuity, guaranteeing your income for an agreed period of time.
When you purchase an annuity, you may be liable to pay income tax depending on your earnings in the tax year you take them.
Drawdown and taking your pension as a number of lump sums.
When you choose pension drawdown as a method of withdrawing money you can take upto 25% of your pension pot tax free.
If you choose pension drawdown, you’ll need to decide how to invest the remainder of your pension pot. You can:
- Buy an annuity with the remainder
- Leave the rest in drawdown and take a number of lump sums over time (subject to income tax)
- Take the whole pension as a lump sum at a later date.
If you withdraw more than 25% as a lump sum in one go, you’re liable to pay income tax at the standard rate as you cross each personal allowance threshold for the year. You may fall into a higher tax bracket if you withdraw large amounts from your pension pot.
You must be aware of the charges associated with taking a number of lump sums, it’s possible that you could pay more in fees than you would income tax. Do I need a financial advisor to withdraw my defined contribution pensions
What exit fees are associated with defined contribution pension transfer and withdrawal
From 2017, Christopher Woolard, Executive Director of Strategy and Competition at the FCA introduced the 1%, of the total balance, cap on early exit charges for existing pensions, and a 0% cap on new contracts.
This is so that current and future savers will not be deterred from accessing their pension pots by excessive charges.
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