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Beware when transferring your pension

In April the government changed the amount of pension that can be taken via drawdown from 120% to 100%, however if you were already in drawdown you didn’t have to change the amount you were currently taking as a pension. You are allowed to continue receiving the same pension up until your next review date which could have been anything up to 5 years and this was pretty good news as GAD rates were also tumbling. However this all changes if you decide to transfer your existing pension into another scheme.

When you transfer your pension to the new scheme they will continue to pay your pension just as the old one did. But, and it’s a very big but, your next review date will come around a lot sooner than you may have expected. The new provider will have to review your pension income on the next anniversary date even if there are a few more years to run until your expected review date. The main issue with this is that the new 100% limit will have to be used, and in most cases this will reduce the amount of income available. As I talked about in one of my recent blogs, this could decrease your allowable income by up to 50%.

Eg. Clive, a 60 year old man, started to drawdown on his pension pot on the 15th January 2010 crystallising 50% of his pension. Then in November that same year he felt he needed more income and therefore crystallised the remaining 50%. In the summer of 2011 he decided to transfer his pension to another provider and continue in ‘capped’ drawdown (as the name changed in April). Clive believed that his first 50% review would be in January 2015 and the second half would be reviewed November 2015.

Due to the changes in pension legislation, the second half of his crystallised funds would be reviewed in November 2011 and his first half would be reviewed in January 2012. The amount he will be able to take from the most recent reviews could be substantially lower and could really affect his current lifestyle.

If you are thinking about transferring your pension, especially if you’re currently in drawdown, then you should attempt to seek advice from a regulated Independent Financial Adviser.

Matthew Rankine

Sep 26, 2011