Your IndustryNov 21 2013

Pros and cons of transferring

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Helen Dreyfuss, principle technical specialist of the Pensions Advisory Service, says individuals need to consider their own situation carefully.

She says: “They may be tempted to put all their pensions together into one place. However, this may not be in their best interests; they need to think carefully about transferring each pension entitlement.”

Advisers should ask their client’s pension provider for a valuation of the scheme, so they can see how well it has performed, she says. A transfer value should also be requested, which should show whether there are any exit penalties when the client switches the scheme.

But Ms Dreyfuss says advisers should remember that pension valuations and transfer values fluctuate daily.

She says considerations should include:

1) Exit penalties

If there are any exit penalties on the existing policy, Ms Dreyfuss says they could cancel out the benefit of transferring to a new provider. Newer schemes may not charge for transfers, she adds, but older pensions might.

“Providers sometimes deduct as much as 20 per cent of the pension fund via a market value reduction (MVR), a type of exit penalty.

“If the charges are high, it may be worth retaining the plan for longer to see whether the penalties ease. If the prospects for a fund don’t look good, it may be worth suffering the exit penalties, with the hope that the losses will be recouped by a new stronger-performing fund.”

2) Additional Costs

If the new pension costs more in regular charges than the original one, Ms Dreyfuss says an adviser should make sure the client is satisfied that the additional cost provides additional features that they need. For example, she says it may offer them access to a wider range of funds.

Information about the costs of the new pension will be set out in the key features document. Ms Dreyfuss says this document should be checked by the client to ensure it refers to the actual funds and investments they have selected.

3) Lost bonuses

Some providers offers fund bonuses to investors who stay with them (and make regular contributions). Others reduce their annual management charge the longer they stay with them.

Ms Dreyfuss warns a new provider may not be able to match these offers.

4) Tax-free cash

Some individuals have protected tax-free cash of more than 25 per cent, where benefits were accrued before 6 April 2006. Ms Dreyfuss warns they could lose this protection if they transfer away from that plan.

5) Protected pension age

Some individuals will have a protected pension lower retirement age under their pension scheme, which Ms Dreyfuss warns would be lost on transfer.

6) Lifetime allowance protection

There are different types of protection that individuals can take out to protect their benefits against the lifetime allowance. Ms Dreyfuss says they should check to be certain that by transferring they are not losing protection.

7) Reduced transfer value

If an individual is in a final-salary scheme that is under-funded, the transfer value the client is offered may be reduced.

8) Loss of benefits

Some funds may include valuable benefits such as guaranteed annuity rates (Gars) at retirement. This means the income an individual receives when they retire is likely to be significantly more generous than they would get on the open market. This could apply to schemes opened in the 1960s right up to the mid-1980s.

However advisers should also consider that pension transfers offer the possibility of a higher pension at retirement and the chance to vary benefit “shape”, according to David Trenner, technical director of Glasgow-based financial advisory firm Intelligent Pensions.

For example, Mr Trenner says a pension transfer could mean there is no need for a widow’s pension if single or widowed.

Pension transfers can also mean you have the chance to take phased benefits and also offer the possibility of better death benefits and higher tax free cash, he adds.