Pensions are crucial to building that dream retirement. But they’re largely invisible to us for most of our careers – that is, unless we go looking for them. And once you start digging into the weeds of your investments and fees, you may start wondering if it’s worth moving your pension elsewhere. There are several reasons you might want to consider a pension transfer:
- Peace of mind from consolidating multiple pension pots
- Seeking better returns and lower fees
- More investment control
- Poor experience with a provider
However, it's important to avoid common pension transfer mistakes.
What are the different pension types in the UK?
Let’s start with the basics. It’s important to understand the different types of pensions that exist and the features of each.
| Feature | Defined Benefit (DB) | Defined Contribution (DC) | Self-Invested Personal Pension Plan (SIPP) |
|---|---|---|---|
| Income guarantee | ✓ Guaranteed for life | ✗ Based on pot size | ✗ Based on pot size |
| Investment risk | Employer bears risk | Individual bears risk | Individual bears risk |
| Investment choice | ✗ Limited or none | ⚠️ Some choice | ✓ Wide range of options |
| Transfer requirements | Pension transfer rules require financial advice if valued over £30k and transferring to DC/SIPP | Generally transferable | Generally transferable |
| Special benefits | Often includes inflation protection, death benefits | Tax-free lump sum, may include a guaranteed minimum pension | Tax-free lump sum, more flexible withdrawals |
For a comprehensive guide, read our exploration of the different types of pensions in the UK.
Now, let’s jump into the top questions you should be considering when planning a transfer.
1: Can you transfer a DB scheme to a SIPP?
Defined Benefit (DB) schemes have a reputation for being the "gold-plated" pensions. This is with good reason, as they can:
- Provide guaranteed income for life
- Include inflation protection
- Offer death benefits for your spouse
When transferring a DB pension to a SIPP, you exchange these guaranteed benefits for a Cash Equivalent Transfer Value (CETV). While this lump sum might look tempting, you might achieve a lower pension income in the end. And by transferring, you take on all investment risk previously shouldered by your employer.
In some cases, you CAN transfer a DB scheme to a SIPP, but you must receive financial advice if the value of the scheme exceeds £30k. Even so, some providers (like Freetrade) do not accept transfers from DB schemes.
2: How much does a pension transfer cost?
The hidden costs of transferring a pension can significantly reduce your retirement savings. A study by People's Partnership found that 72% of pension savers who recently transferred their pension were unaware of the charges they would incur.
| Fee Type | Description | Typical Range | Notes |
|---|---|---|---|
| Exit Penalties | One-time cost some providers impose when leaving your current scheme | 0 - 10% | - Older schemes often have higher charges
- Fees were capped at 1% for savers over 55 in post-2017 pensions - Banned for new plans |
| Annual Management Charge (AMC) | Cost to run your pension, paid once a year | 0.2 - 2% | - Fees capped at 0.75% for post-2015 auto-enrollment schemes |
| Fund Fees | Cost set by the fund manager of your portfolio | 0.1 - 1.5%
(on avg. 0.25% for UK passive funds) |
- Lower for passive funds (ETFs)
- Higher for actively managed funds - Usually taken from fund, daily (not from your account) |
| Platform Fee | Cost to keep your holdings in one place | 0.2 - 0.75% or £5 - £15 monthly | - Percentage fee may decrease with larger pension pots |
| Service/Policy Fee | Additional administration costs | 0.5 - 0.75% annually | - Not all providers charge this
- Capped at 0.75% |
| Inactivity Fee | Cost applied to dormant pensions | 0 - 1% additional | - Applied when you stop contributing to a workplace pension
- Not all providers charge this |
| Transfer Fee | Cost of moving your pension | £0 - £500 flat fee | - Separate from exit penalties |
3: How much are your pension fees?
Even small differences in percentage fees can have a dramatic effect on your pension value over time. The FCA's retirement income market study demonstrated that just a 0.5% difference in annual charges could reduce a £100,000 pension pot by 5% – essentially, a £5,000 fee.
It’s easy to only focus on the headline annual management charge, missing the total expense ratio. When comparing pension options, always ask for the "total cost of ownership" or "ongoing charges figure" to get the full picture of what you'll pay.
If you’re moving to a SIPP, your investment decisions will determine the ongoing costs, so you may want to factor trading and fund management fees when comparing your options.
4: How do pension transfers impact taxes?
Pensions offer tax relief, which works like a top-up to your initial contributions. Most pension schemes also allow 25% tax-free cash withdrawal, but there are important considerations to look into if you’re considering a transfer.
- Some older schemes offer "protected tax-free cash" rights above 25%
- Transferring could cause you to lose these enhanced tax-free amounts
- If you’re approaching retirement, transferring could reset when you can access this tax-free cash
5: How can you invest your pension?
DC and DB pensions typically offer fewer investment options than a SIPP, which can limit your portfolio diversification or force you to invest in companies that might go against your values.
SIPPs usually provide access to:
- Individual shares
- Exchange Traded Funds (ETFs)
- Investment trusts
- Bonds
- Money Market Funds (MMFs)
- Environmental Social Governance (ESG) Funds
Be sure to evaluate whether the new provider's investment options align with your goals and preferences.
6: Is this a pension scam?
When considering a pension transfer, particularly where there is an incentive involved, you should ask yourself if it could be a pension scam. Warning signs could include cold calls, aggressive sales tactics and offers that seem too good to be true.
If in any doubt, make sure to verify your chosen new provider with the FCA register to ensure they are legitimate. You can also use the FCA’s ScamSmart tool to help you steer clear of investment and pension cons.
Freetrade is a signatory of the Pension Scam Pledge that commits us to protecting consumers and combating scams.
When should you transfer your pension?
Transferring your pension might make sense when:
- You want to consolidate multiple pensions
- You want to make your own investment decisions
- Your existing pension performs poorly
- You need more investment choice
- It better aligns with your retirement goals
What are the red flags for pension transfers?
The Pensions Regulator has a list of red flags for pension scheme administrators when dealing with transfer requests. While these serve as guidance for the professionals who administer your scheme, they can also be useful to you, as they offer an idea of problems to watch out for.
When you start a transfer, your current pension provider may ask you for details about the transfer and the new scheme. This is done to keep you safe and ensure you are not falling victim to a scam.
Relevant red flags to watch out for include:
- Unsolicited contact: Have you received cold calls or emails from unfamiliar companies promoting a pension transfer?
- Pressure: Have you been put under pressure to go through with a pension transfer?
- Lack of MoneyHelper guidance: MoneyHelper offers free guidance on pension transfers, and you should be referred to the service by any new provider.
- Incentives: Have you been offered any incentives to transfer your pension? Offering incentives to new pension customers is legal and some legitimate providers (like Freetrade) do this, but it is also a tactic used by scammers.
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