Pension Transfer ? Important Things to Look into Before Transferring
Every month, individuals make considerable contributions to their pension fund, which accumulates into a hefty sum overtime. Many individuals do not give too much thought about their pension fund and are content in contributing a fixed amount every time, only looking at their investment come near their retirement. Contributions are typically made on a monthly basis regardless of the investment’s value or comparative performance. Thus, many people are not getting the best value that they could be getting with their investment. Pension transfers are one way for individuals to maximize their pension fund investment. If you are looking to make the most out of your pension monthly payments then you may want to consider transferring your pension.
Looking at your current pension investment’s performance
Before you jump at the chance of widening your investments, however, you have to assess whether pension transfer is right for your particular situation. It will depend a lot on the current performance of your pension fund. If it is doing well and giving you maximum returns then there’s no point in transferring elsewhere. Your pension is likely one of the biggest investments you have, together with buying your home. As with any investment where you put your hard-earned money in, you want to make sure that it is working had for you. It should be giving you the best possible returns compared to other investments you can put your money in that has the same level of risk. Just as following local real estate prices and rates to assess the value of your home and thus your real estate investment, you should also be following the value of your pension investments.
Looking beyond performance and value
Tracking your pension fund investment doesn’t end with looking at its performance and overall value to determine if you should go ahead with a transfer of pension. You should also review your current administration and management fees and compare them with the average fees in the market to see if you could get a better deal for a lot less. This will save you a lot of money in the long run—money that could go into investing in your pension fund instead of management fees that do not earn interest.
Looking for a financial adviser
If you have decided that there are better deals elsewhere and that transferring your pension fund will get you higher returns of investment, you should first seek the expert advice of a professional financial adviser. When choosing a financial adviser, make sure that he or she is independent of any pension investment company—in other words, the adviser should not be interested in selling to you a particular product but in giving you information on the best possible deals and transfers that you could make. Also look for a financial adviser that is registered with the government or any certified agency and has a good track record.
Looking at transfer value
One of the primary things you need to look at to determine if you should transfer your pension is a pension transfer value analysis. This is a computerised calculation that allows you to compare the performance and value of your current pension with other investment alternatives. Included in the analysis is a "critical yield" which shows you how fast a replacement scheme will have to grow to match the present performance of your pension scheme. The critical yield is typically between 7% and 11%. As a rule of thumb, anything returning less than 8% is not a good investment and therefore an indication to transfer your pension. Your financial adviser should be able to give light to your transfer value analysis. Your adviser should also be able to assess the current performance and financial position of your present scheme. If your current scheme is showing a surplus of assets over liabilities, then it may be worthwhile to stay with your current pension scheme. In this case, your adviser should not be pressuring you to transfer for the sake of transferring (and getting a commission from the pension company on his or her part).
Other factors to consider
Before finally deciding on transferring your pension, you have to reassess your intentions regarding your retirement and set your goals straight. The first question, obviously, is how soon you hope to draw on your pension, whether you want to retire early or later on. If you wish to retire early and draw on your pension for your living expense, you need to make sure that the transfer pension scheme in which you will replace your current one is flexible enough to allow early retirement. Aside from looking for a more profitable investment, some people wish to transfer their pension because they have been made redundant. In this case, seeking the help of a financial adviser is invaluable to sift through the wide array of choices available.
When not to transfer
It’s not wise to transfer an existing occupational pension scheme where both you and your employer are making contributions. The benefits provided by your employer are likely to be better than any private pension scheme available. You should only consider a transfer if you have been made redundant or if you leave your employer. If you have a public sector pension scheme, it is best to stay with that scheme even if you are no longer employed in the public sector. Public schemes such as teachers’ or nurses’ scheme are good investments because they are guaranteed against inflation no matter how high the inflation rises. Public schemes, unlike private ones, allow linking of various service years should you return to your job in the public sector. Some UK pension transfer companies do not accept transfers from public schemes because they know that the benefits from these schemes cannot be matched. Pseudo-public sector schemes are also hard to match elsewhere because they provide extremely generous benefits. Some examples are water schemes and mineworkers’ schemes. If you have an existing pseudo-public scheme, then you should think twice.
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