Page last updated at 23:11 GMT, Tuesday, 13 May 2008 00:11 UK

Is moving your pension a good idea?

Money Talk
By Mark Duke, Towers Perrin

Mark Duke, Towers Perrin
Mark Duke, Towers Perrin

Are you one of the millions of people with pension benefits left behind in a previous employer's plan?

If so, you may soon get a letter asking whether you want to consider moving these benefits into a new plan, such as a personal pension.

What is more, the letter may tell you that if you take action soon, your transfer value will be "topped up", or you may even be offered a cash-in-hand inducement.

So, what should you do next and why would an ex-employer make this type of offer?

Uncertainty

Don't throw the letter away because this could be a good offer for you.

You could get a higher or lower pension depending, for example, on the way your pension investments perform

But let's go back to the basics.

The pension you have left behind is called a deferred pension.

And as a deferred pensioner you have the right to ask that the cash equivalent (or transfer value) of that pension is paid into your current, or a new, pension plan.

Calculating what your deferred pension is worth is not easy.

The trustees of the plan have to estimate how much money they need to set aside now in order to pay out your pension in future.

One of many things they cannot know for sure is how long you will live.

It is exactly because the cost of the pension is uncertain that many companies have decided it might be in their interests (and yours) to make it attractive for deferred pensioners to move their pension somewhere else.

The company reduces its risks, you get to manage your pension, but you take on the risk.

If you take up the offer you could get a higher or lower pension depending, for example, on the way your pension investments perform.

Although this is not a simple comparison to make, here are five rules to follow that will help you get through the process successfully.

Independent financial advice

The first thing to do is take some advice.

Sometimes your ex-employer will pay for you to get that advice.

If so, make use of the facility.

No one can make you transfer, but it cannot hurt to find out what a financial adviser would recommend you do.

If there is no advice on offer, ask why not, and if you have to, find an adviser qualified to make recommendations about transfer values.

The second rule is not to be seduced by cash alone.

If the offer includes a cash in hand incentive, it might be very attractive to have a few hundred pounds extra cash in your pocket.

But remember, you will almost certainly have to pay income tax on the money and giving up your deferred pension with your former employer might not be a good deal.

Risk

If the transfer value is high enough and your adviser thinks it is a good idea, you might get the best of both worlds - some extra cash and the opportunity to get a pension better suited to you.

Do not put at risk what you cannot afford to lose

If in doubt though, do not transfer

An offer that arrives without proper explanation, or comes with a pile of small print that you do not understand, is probably best avoided, unless you are professionally advised to transfer.

The fourth rule is to know what you are taking on.

Once this pension money becomes yours to control, you need to know that it is going to be invested in a way that's right for you.

This means having a good understanding of how much risk you want to take and being sure that your money will be invested in a manner consistent with that.

If you are advised well you will be shown your investment options and the potential good and bad outcomes they can produce.

Do not put at risk what you cannot afford to lose.

Important

Finally, check what else is going on with the pension plan.

Your adviser will make sure that you are not being disadvantaged because of what else is happening to the plan.

For example, it can make a difference if the plan is about to be wound up or if the plan looks like it might fail and will have to rely on what is known as the Pension Protection Fund.

To sum up, if you are made a pension transfer offer, take it seriously and get some advice.

Do not be put off by the jargon. This could be one of the most important financial decisions you are ever asked to make.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.



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