Should I transfer my pension? 6 key considerations

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.

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. 

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. 

Pension transfer considerations - FAQs

How long does a pension transfer take?

Pension transfers can take weeks or even months, especially if there are difficulties. To ensure things run as smoothly as possible, enter all information on application forms correctly and respond to provider enquiries in good time.

Can I transfer my pension to a SIPP?

Most pensions can be transferred into a SIPP. However, there are some exceptions. 

To be eligible to transfer into a Freetrade SIPP, the transferring pension must be:

• An existing SIPP
• Individual Personal Pension (IPP)
• Stakeholder Pension Plan (SHP)
• Free Standing Additional Voluntary Contributions (FSAVC)
• Trust-Based Workplace Pension Plan