Transferring To a Personal Pension Plan
We have been noticing a growing trend among financial advisers to talk to their clients about transferring to a personal pension plan as opposed to continuing with a workplace pension. Not that this is always the best idea, but at least it is an option worthy of preliminary investigation. Personal pensions do offer some benefits not available through workplace schemes. Then again, they also come with certain risks as well. If you already participate in a workplace pension, you may be content to continue as is. But perhaps establishing a new personal pension is something worth thinking about.
Let us begin our discussion of this topic by defining the difference between a private and personal pension. The terms are often interchanged, even though they are two distinctly different things.
A private pension is any pension plan established by a private company, organisation, or individual investor. It is easy to understand if you simply compare the private pension with a public sector pension. As you know, public sector pensions are those established and maintained by government agencies and other public-sector organisations, including schools and hospitals. Private pensions are the domain of any organisation that is not public-sector.
As for personal pensions, they are private pensions established outside the domain of the workplace. There are three primary personal pensions that cover most of the plans in the UK. These are:
- Stakeholder Pensions – A stakeholder pension is established between an individual pension saver and either an insurance company or specialist operator. These pensions can sometimes be offered through employers, but the employer acts merely as a facilitator in such cases. The employer actually has nothing to do with the pension and has no vested interest in it.
- SIPP –A self-invested personal pension is the most commonly used personal pension in the UK. An investor establishes one simply by purchasing a membership in an existing plan. These are usually provided by insurance companies, banks, and specialist pension operators.
- QROPS –The qualifying recognised overseas pension scheme is a personal pension for UK workers who plan to retire overseas. Such a scheme enables the pensioner to take his or her money with them when they leave the UK. QROPS come with quite a few rules and restrictions.
If you are currently invested in a workplace pension exclusively, you have no personal pensions to worry about. But what if you wanted to transfer out of your workplace scheme and into a new personal pension plan? Is it possible? And if so, what do you need to know about it?
Transferring with Pension
The first thing to understand about transferring to a personal pension plan is that it is now entirely possible thanks to pension reform. Before reform, transferring was a bit more complicated and, in most cases, rather expensive. That has changed for the most part. You can now transfer a workplace pension pot to a qualifying personal pension with no tax penalties involved. You need only pay any extra fees and administrative charges attached by your current pension provider.
You might be wondering why people undertake such transfers if they are invested in a workplace pension. It is a good question with multiple answers. An investor may choose to transfer due to one of the following circumstances:
- Poor Performance – It could be that the investor's current workplace pension is performing poorly. That investor may believe he or she can do better by transferring to a SIPP or stakeholder pension.
- Winding Up – There are cases when an employer decides to wind up an existing workplace pension in favour of establishing a new one. If an employee does not necessarily like the new pension plan, he or she may instead prefer to transfer to a new personal pension plan of his/her choosing.
- Changing Jobs – Changing jobs is a common reason for transferring a workplace pension to a new workplace scheme. Still, there are some workers who take the opportunity of a job change to establish a personal pension they have more control over.
- Employer Closing – Lastly, there are times when a pension transfer is necessary due to an employer closing its doors. In such a case, the pension saver must do something with his or her money because it cannot remain where it is. Some will choose to move it to a new workplace scheme while others will choose to open a new personal pension.
As you can see, there are lots of reasons for transferring to a personal pension plan. Whether or not it is the right option for you really depends on your current circumstances and future goals. Suffice to say that you should never make a transfer decision lightly. There is plenty to consider before making such a move.
The Costs of Transferring a Pension
You may not realise it, but there are costs involved in transferring to a personal pension. Those costs are realised by way of fees and charges assessed by your current pension operator. By the way, such costs and fees are entirely legal. It is not as though pension operators are ripping off their customers by illegally charging them for services they do not provide.
So, what are the fees and charges? One of the more common is known as an exit fee. This fee is charged to recover the administrative costs of making the transfer and to partially make up for lost profits that will inevitably result from a member's early exit. Some older pension schemes established prior to the turn of the 21st century include punitive fees put in place to discourage members from exiting early.
You need to know about and fees and charges associated with the transfer in order to determine whether or not it is truly a wise move. It could be that your fees and charges are minimal and, as such, will not affect your decision to transfer. But it could also be that the cost of transferring your pension is too high to make doing so worthwhile. If costs are too high, you might be better off leaving your money where it is.
Be Careful of Transfer Scams
Pension reform has made transferring to a personal pension easier and less expensive than it has ever been. But it has also given rise to a number of transfer scams now being observed throughout the UK. Most of the scams involve unrealistic promises of high returns on non-qualifying investments and/or fraudulent promises of releasing some of the investor's pension value by way of cash.
We recommend that you never, ever agree to an unsolicited transfer offer without first seeking the advice of an experienced financial advisor. We urge you to use an extra measure of caution if you are under the age of 55. Any illegitimate transfer offer that ends up being classified by the government as an unauthorised transaction could result in punitive taxes totalling as much as 75% of your pension pot. This includes both penalties and income tax.
Transferring to a personal pension plan may be a wise move in your case. But it could also be a dangerous one. Please be sure to know and understand all the rules surrounding pension transfer and to get plenty of advice from experts. There are financial charities offering free advice as well as financial advisors offering paid advice. There is also no shortage of free guidance available from the government.
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