9 Hot Tips for Conducting UK Pension Transfers
Have you lived in the same house for your entire life? Few of us have. In fact, movement is part of our everyday lives. From the time we climb out of bed in the morning, until we climb back into it at nighttime, our lives are in perpetual motion. We move our vehicles to get to work. We move our eyes to read newspapers, novels, and computer screens. Sometimes we even move everything we own from one apartment or house, to another one.
Similarly, sometimes we need to move our pensions. Pensions are vital tools by which we can ultimately purchase an annuity, and live the comfortable retirement that we have earned. A pension transfer involves transferring the value of contributions in one particular scheme, into another particular scheme. However, after transferring the pension, you cannot transfer it back! Here are some tips for implementing a pension transfer:
1. Remember that you cannot retransfer after transferring
After conducting a pension transfer from one scheme to another, the deal is complete. You cannot transfer your pension back to the original pension scheme. Thus, you must be 100% certain that you are ready to transfer your pension (such as in a company pension transfer), before conducting the transfer.
2. Seek the advice of an Independent Financial Adviser (IFA)
It is advisable that you secure at least three quotes before you transfer your pension. Availing of an IFA’s services is vital. IFAs can access the entire market for UK pensions, thus providing you with the best price possible. Furthermore, the UK’s Financial Services Authority (FSA) regulates IFAs, and if they fail to provide you with the best deal available you may be eligible for compensation.
How should you find an IFA? While you can certainly locate IFAs in a phonebook, it is recommended that you find one through personal references.
3. Determine if transferring your pension is wise
Will everyone benefit from a pension transfer? Because every pension holder has a different situation, the answer is: no. Just because your Uncle Armand or Aunt Aretha benefited from a pension transfer, never assume that you definitely will. Nevertheless, certain situations exist in which it is fiscally logical to transfer your pension to another scheme. As pension transfer specialists would likely tell you, these situations include:
• You want to transfer pension contributions from a high-fee Personal Pension, to a low-fee Personal Pension
• You want to combine your current Personal Pension into an Occupational Pension scheme
• Your current company pension scheme is being wound up
4. Learn about the two major types of pensions
Why is this important? Pension providers use a different set of methods for the different types of pensions, to determine the transfer value. Now, onto the major types of UK pensions:
A. Final Salary (Defined Benefit) Pension Schemes
These pensions guarantee that you will receive a pension that is a set percentage of your last salary at a company –your "final salary."
B. Money Purchase (Defined Contribution) Pension Schemes
The pension provider combines your contributions. Then after you retire, the pension provider purchases an annuity, which provides you with a guaranteed income for your entire retirement.
5. Never feel hopeless if your employer becomes bankrupt
If you were to find yourself in this situation, it might seem natural to worry about losing your company’s pension. Fortunately, in April of 2005 the UK launched the Pension Protection Fund. While you may still lose a portion of your pension’s pension transfer value, you are now unlikely to lose it all. If you have a Final Salary pension, simply wait until the company has completed its winding-up process.
6. Cautiously transfer out of a Final Salary pension that is in deficit
Before taking any action, be certain to seek the council of an IFA. Consider issues such as why the company scheme is in the red, and how significantly lower your pension transfer value would be.
7. Understand that you must transfer different pension types differently
Depending on whether you must transfer a Final Salary or Money Purchase pension, the process is different.
Here are the steps for transferring a Final Salary pension. You must create a "Statement of Entitlement" written request for your pension’s administrators. Next, the administrators will supply you with a pension value for your pension. If you choose to proceed with the pension transfer then the administrator of your pension scheme must complete the pension transfer within six months following your request.
Meanwhile, the process is different when you conduct pension transfers from a Purchase Pension. First, contact the administrators of your current pension scheme. Next, they will use your pension contributions’ current value, to determine the transfer value of your pension. It is important to realize that the pension’s transfer value could be greater or lower at the time of the actual transfer. If you determine to continue with the transfer, then submit a written application to the administrators of your pension scheme. Within six months they must complete the pension transfer.
8. Be prepared to pay fees
Fees related to pension transfers are a major issue that you should consider. In fact, the total of these fees can equal several percentage points of your transfer value! Typically, a pension provider will deduct the fees from your transfer value when they conduct the pension transfer.
9. Remember that you cannot transfer all pensions
Although you can transfer most types of Occupational Pensions and Personal Pensions, some exceptions exist and are mainly applicable to public sector workers:
• You cannot transfer a pension if your Final Salary pension increases along with inflation.
• You cannot transfer a pension if you are within 12 months of the retirement age of your pension scheme.
• You cannot transfer a pension if you left a pension scheme in the public sector, prior to January 1, 1986.
Today’s pensions transfer represents the mobility of modern life. Nevertheless, because moves should be done rightly, first consider the aforementioned tips before relocating your pension.
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