Sometimes we are unprepared for changes. Once we become settled in our "comfort zone," taking a step into the Great Unknown can seem awkward or even frightening. Nevertheless, Spencer Johnson reveals in "Who Moved My Cheese?" that change provides us with new opportunities, if we are willing to take chances. While change is not always easy, it can certainly provide us opportunities that we lacked before.
Perhaps one of the most challenging areas of our lives in which we can enact change, is in our personal finances. Transferring funds from a saving account into stocks or mutual funds can create feelings of uncertainly. Similarly, we may also be hesitant to transfer our UK pension, from one scheme into another scheme. However, remember that knowledge is power. Here are some Frequently Asked Questions (FAQs) and their answers, to make the process seem less frightening:
1. What exactly is a pension transfer?
As its name suggestions, a Pension Transfer involves a "pension" and a "transfer." You switch or alter the amount of contributions in one particular pension scheme, into a different pension scheme. It is important to realize that your membership in the former pension scheme ceases, after conducting the pensions transfer.
2. Should I seek the services of an Independent Financial Adviser (IFA)?
In short, the answer is: yes. An IFA has access to the entire UK pension market, so you can be assured that he or she will find the best deal in the nation. And if an IFA fails to do that, then you could actually be eligible to receive compensation. Another "quality control" measure involving IFAs is that the Financial Services Authority (FSA) constantly regulates them. This helps to prevent the mis-selling of different financial products.
3. Is it always wise to transfer a pension?
While a pension transfer is ideal for many Britons, not all Britons will benefit from it. In fact, you should not assume that because you know someone who has benefited from a pension transfer–that you also will. Nevertheless, certain situations exist in which it is financial beneficial for you to transfer your pension. Here are some of them:
• You want to respond to your current Occupational Pension scheme being wound up
• You want to add your Personal Pension to an Occupational Pension
• You want to have a low-fee Personal Pension, rather than a high-fee Personal Pension
4. Are the fees high when conducting a transfer of pension?
That is a possibility. When the pension transfer occurs, pension providers subtract fees from your transfer value. When transferring a pension, your current pension provider may charge you fees. In fact, these fees can be worth several percentage points of your transfer value! Keep in mind that even if your new pension has superior benefits, your fees could actually offset them.
5. How do pension providers calculate the transfer value of a pension?
This is based on the type of pension involved, with two primary types existing:
A. Final Salary (Defined Benefit) Pension Schemes
This type of pension secures you a pension that is based on the salary you had when you left a company or retired. The pension that you will receive is set before you receive it—regardless of your contributions’ value.
B. Money Purchase (Defined Contribution) Pension Schemes
In this case, your pension contributions are invested and combined. Then upon your retirement, your pension provider calculates your total contributions and purchases an annuity. The annuity will provide you with a lifetime of guaranteed income. While the contributions of this type of transfer pension are fixed, the pension that you get upon your retirement—is not.
5. Can I transfer an old pension scheme into all new pension schemes?
The answer is: maybe. While some pension schemes accept internal transfers, others do not. Thus, it is important for you to first seek the advice of an IFA, to determine whether or not the new pension scheme would accept the transfer of your pension.
6. Can I transfer a pension scheme into cash or into an ISA?
That is impossible, as you cannot withdraw funds from your pension until your retirement. Even at that juncture you must abide by strict rules that control how you can use the money. Instead, you can only transfer funds from one pension, to another pension. The primary purpose for these restrictions is to prevent fraud. In other words, the money that you contribute to a pension is already tax-free, so transferring it into cash would result in tax evasion.
7. Can I transfer any pension?
You can transfer virtually all types of Occupational Pensions and Personal Pensions. However, there are some exceptions to the rule, which are typically related to public sector workers:
• If you have a Final Salary pension scheme whose pension rises along with inflation, then you cannot engage in a uk pension transfer.
• If you are within one year until the retirement age of your pension scheme, then you cannot transfer your pension.
• If you left a pension scheme in the public sector prior to January 1, 1986, then you cannot transfer your pension.
Nevertheless, in each of these cases if you had transferred your pension then you would have still experienced a major reduction in your pension entitlement.
8. Should I transfer out of a Final Salary Occupational Pension that is in deficit?
It depends. However, you should definitely first seek the advice of an IFA. Here are some issues that you should consider:
• Transferring your pension could result in a lower transfer value, in relationship to the pension scheme’s deficit. It is also possible that your current pension scheme could get out of the red.
• Is the company pension scheme in deficit temporarily, or does it have long-term financial problems?
• You could lose your entitlement to the UK’s Pension Protection Fund.
Are you considering uk pension transfers? If so, then consider the aforementioned questions, to determine if it is the right answer for you.
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