What is a transfer in?
We will now look at various things members should consider if they want to transfer in benefits from a previous scheme.
Transfers In
If a member has benefits in a scheme from previous employment they may wish to consider transferring it into the new scheme they are joining.
An advantage of doing this is that all pensions are in the same place but there are two factors to consider first.
1. Will the scheme allow a transfer in and if so, are there any time limits?
There are no legal requirements for a scheme to accept a transfer, if the scheme rules do allow it they may state it has to be done within 12 months of joining or something similar.
2. How the benefits compare between the old scheme and the new scheme?.
The member would need to provide a letter of authority so that a transfer value from the previous scheme can be obtained. The member should be made aware that the previous scheme has 3 months in which to provide the information.
Once the information is received the member will be told of the benefits the new scheme will offer in lieu of the transfer value amount.
It is important to note that benefits are not transferred on a like for like basis and the member may wish to seek regulated financial advice before making a decision.
Defined Benefit Scheme
If the transfer buys defined benefits in the new scheme, the Scheme Actuary will determine how much benefit the transfer value will purchase in the scheme. This will normally be stated as:
A member may have been in the previous scheme for 10 years and have a pension at date of leaving of £6,000 per annum. The benefits will not be the same in the new scheme. There are lots of things that could be different in the new scheme such as salary definition, accrual rate, funding assumptions etc.
The benefits offered may seem lower but for example if extra pensionable service is offered, the pension will be calculated using that extra service and based on the salary near retirement.
The extra pension or service would also be taken into account if the member dies before retirement so the benefit could possibly be higher in the new scheme when compared with death benefits for deferred pensioners in the old scheme.
The member needs to determine if the pension in the old scheme is likely to produce a higher pension in retirement than the benefits offered in the new scheme. The member should compare accrual rates and check if the old scheme has any benefits that cannot be replaced in the new scheme.
Defined Contribution Scheme
If the new scheme is on a Defined Contribution basis the transfer value will be added to the member’s pension pot so the decision to transfer is around investment performance and charges.
If the old scheme was also on a Defined Contribution basis then the member needs to consider if the investment funds in the new scheme are likely to perform better and provide a higher fund value at retirement than those in the old scheme, do the investment options suit the member’s investment strategy any better or offer more flexibility.
Other factors they might like to consider are:
It is important to note that transfer values from Defined Contribution schemes are not guaranteed so the amount actually received may be lower than the amount quoted. There is nothing the member can do about this as it is based on the value of the fund when it is disinvested.
Risk Area
A member should not generally consider transferring benefits from a Defined Benefit scheme into a Defined Contribution scheme. They would be giving up a guaranteed pension amount for an unknown pension amount however, there may be circumstances specific to the individual where transferring fixed benefits into a money purchase arrangement is beneficial.
Members may transfer into a DC scheme from a DB scheme in order to access benefits flexibly. However, there are various procedures that must be followed if the transfer value exceeds £30,000, including a requirement to take financial advice from an authorised person.
Schemes in Wind-Up
There are circumstances under which a pension scheme may be wound-up, for example, where a DB scheme is being replaced by DC arrangements.
If a member’s previous scheme is going through this process it can take several years to complete and it may not be possible to obtain a transfer value during this period.
Some of the pros of transferring from one scheme to another might be:
Transferring from a scheme with any form of guaranteed benefits to one which doesn’t have the same, or similar guarantees, would impact the benefits received on retirement. The member would be giving up those guaranteed benefits.
