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Last updated: June 19, 2009 8:05 pm
One of the biggest threats to efficient pension investing is the high charges applied by some providers. By reducing how much of your money goes to the pension company and ensuring as much as possible goes into your fund, you could see a significant improvement in your future benefits and may even be able to retire earlier.
So, if you are setting up a new pension, try to keep the costs to a minimum. If you have an outdated policy, think about transferring it into a low-cost scheme to help your savings grow more efficiently.
Exactly how you set up a new pension or switch an existing one – and the time it takes – will vary depending on the provider but there are some general steps you can follow.
1. Check penalties
If you wish to transfer an existing pension, first find out how much your current provider would charge you to move. Even if you have held money with a provider for many years and your funds have not performed well, you may still face penalties for transferring.
With-profits funds held with life companies, for example, might have transfer penalties and extra charges known as market value adjusters (MVAs) to make up for weak stock markets. Advisers say it is not uncommon to see these funds impose transfer penalties of as much as 10-20 per cent of the value.
2. Request a transfer value
The best way to see the full effects of exit charges is to request a transfer value from your existing provider. This will give an up-to-date valuation of the funds held within the scheme and will break down any transfer fees and other penalties to be deducted. You should also check whether you are giving up any other benefits, such as a guaranteed annuity option, which some older-style pensions offer.
The transfer value could fluctuate before you move the pension, depending on what happens with the markets but it will give a good idea of the amount you will have to switch into a new scheme.
3. Decide on a new scheme
You will need to have an idea from an early stage of the type of pension you wish to set up or transfer to, and which underlying funds you want to invest in. Think about the kind of investment choice you want and how you can achieve this in the most efficient way.
Stakeholder pensions cap annual fees at 1-1.5 per cent but tend to have a limited investment choice. Basic low-cost self-invested personal pensions (Sipps) – provided by companies such as Hargreaves Lansdown, Sippdeal, part of AJ Bell, and Standard Life – may cost less. These are usually free to set up and do not have annual charges. They offer a range of underlying funds and the annual cost depends on which you choose. Hargreaves Lansdown says someone investing in an HSBC tracker fund within its low-cost Sipp would pay just 0.27 per cent in charges per year. Other funds and more sophisticated investments will have higher charges.
4. Calculate if it is worth moving
Once you have the transfer value from your existing provider and an idea of where you want to switch to, you can assess whether the move makes sense. If you have long enough before you retire, it could still be worth switching to a lower-cost pension even if you will have to pay large penalties to do so.
Ask your provider for a projection of benefits at retirement if you were to remain in the same funds. The new provider should be able to provide a comparison based on your new funds.
“Investors need to look at what their new pension scheme is likely to deliver in terms of performance,” says Billy Mackay, marketing director at AJ Bell. “If they are paying large penalties, they have to be expecting their new funds to significantly outperform to make up for the charges.”
5. Apply for your new pension
Once you have decided which pension to open, the process should be straightforward. Some low-cost Sipp providers require you to go through an adviser, but others, including Hargreaves and Sippdeal, let you apply online.
You will have to complete an application form, which will include details of any funds you want to transfer. The new company will contact your old provider to request the transfer. Your existing company will issue discharge forms that you will have to sign.
6. Make the switch
Once your existing company has confirmation that you wish to transfer elsewhere, it should release the funds. Advisers say this process can be done in just a week or can drag on for months, depending on the provider. If you are moving from a closed life company, it could take longer and advisers suggest you keep chasing the company to move your money.
You have very little control over the precise day when the switch will take place so, if you are concerned about market timing, you could ask for your funds to be moved into cash in advance.
7. Reinvest your funds
Your funds will be deposited into your new scheme in cash and you will then have to move them into your chosen investments. You can do this in one go or invest over a period of time to smooth out market swings.
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