As the economic and social pressures have built on the pensions industry, and people’s working lives have been radically changed, so the likelihood and frequency of pension transfers has increased.
The deficit in company pension funds providing defined benefit or final salary pensions has prompted closures of schemes to new entrants and moves to transfer employees into defined contribution pension schemes which are not linked to earnings, but rather depend on contributions and investment performance.
An increasingly popular option for people with a number of defined-contribution plans is to consolidate them in a Self Invested Personal Pension (SIPP) as this type of pension offers control, over how pension investments are made, and flexibility.
For example, the wide investment choice available in some SIPPs can allow investors to place funds in a number of different investments to spread risk.
In the Fair Investment SIPP, schemes that can normally be transferred include personal pension plans, stakeholder pension plans, retirement annuity contracts (a forerunner to personal pensions replaced in 1988), group personal pensions (provided by an employer) and free standing additional voluntary contribution plans (FSAVCs – for extra contributions on top of an occupational pension).
Knowing the implications
It is important to be fully informed about the implications of transferring from one pension to another. There are clear risks attached to moving from a scheme that provides a defined level of pension in retirement – such as a final salary pension – and one that relies largely on contributions and investment performance like a SIPP.
Independent financial advice should be sought where you are unsure about a pension transfer and for greater information on the implications of a transfer.
As well as this, there may be other considerations such as whether you can move a contracted-out or protected rights pension, and whether there are any other guaranteed benefits that might be lost from moving out of a scheme.
The other key consideration will be charges. The cost of a personal pension will vary and you should be clear on what you are receiving in exchange for the charges you are paying.
Protected rights and transfers
Contracted-out pensions and protected rights pensions relate to the state second pension (previously known as the state earnings-related pension scheme SERPS). You are eligible to accrue a state second pension (on top of the basic state pension) if you are or have been employed and earning over a minimum amount.
Pension savers have been able to contract-out into a personal or occupational pension scheme since 1988, allowing National Insurance contributions to be paid into a pension plan rather than the state second pension (S2P).
In a personal pension this means the government will pay a rebate from your National Insurance contributions into your pension.
The funds built up from contracted-out payments are known as protected rights and form part of your pension when you retire. Since 2008 it has been possible to move a protected rights pension into a Self Invested Personal Pension (SIPP) which allows greater flexibility and control over pension investments.
However, from April 2012 new regulations will prevent the option of contracting-out a pension to a defined contribution pension. If you have been in a contracted-out scheme you will return to the S2P.
The funds built up on a contracted-out scheme, protected rights, will remain in your pension fund to be used in place of the S2P you would have built up. The rules on how this amount can be used will be changed from April 2012 removing the restrictions currently attached to accessing protected rights funds.
© Fair Investment Company Ltd