Personal Finance: Love them and leave them?

Vivienne Starkey on the pros and cons of transferring pensions

ALMOST all of us will change jobs several times during our working lives, go part-time or become self-employed. The more complicated our work patterns, the greater the number of pensions we leave behind, having paid in for a few years. You can either leave your old pensions to grow, or you can cash in the proceeds and stick the money into your current pension plan.

How do you know when to stick and when to switch? There is no magic formula but there are several things to consider that may make your decision easier.

Public-sector employees may find their employer belongs to a Transfer Club that allows benefits to move between various schemes without penalty. For the rest of us transfers of benefits can rarely be made without some cost. So you need to find out whether you can justify a transfer because the benefits will add up to more than the cost of moving your money.

Start by considering what your new employer might be offering. Having read the pension scheme handbook (see box for definition of different pension schemes) you should know what commitment your employer is making. In most cases you will probably be better off joining the scheme.

Now, what have you left behind? Look at your documents and find out. It will be a final salary scheme, a final salary scheme plus AVC, a final salary scheme plus free-standing additional voluntary contributions (FSAVC), a money purchase, a money purchase plus AVC, a money purchase plus FSAVC, or personal pension plan.

It is a good idea to get professional advice to make sure you make the right decision about whether to move your money or leave it where it is to grow. You should start by speaking to the person in charge of the pension scheme at your new place of work. To prepare, work out which of these categories you fit into - don't worry if none of them seem right; not everyone can be pigeonholed. You may also want to see an independent financial adviser who specialises in pension planning.

Old final salary scheme to new final salary scheme. You will have been given a statement by your previous employer showing what your future benefits may be at retirement along with a transfer value. The trustees of the new scheme will be able to show you the possible benefits that this transfer value will buy you in their scheme.

Before making a decision, you will need to take into consideration how long you hope to stay with the new company, what your future salary increases may be, and the contributions you will be making.

Final salary scheme to group money purchase. Here you will be leaving a scheme that offers clearly defined benefits at retirement for one that does not. If you are thinking about moving your transfer value into the money purchase scheme be very cautious. Remember, the amount you get at retirement under money purchase will depend on the performance of the investment funds within the scheme. Plus, there is the risk that annuity rates will be low when you retire.

Final Salary to Personal Pension. It is seldom a good idea to swap your guaranteed pension in a final salary scheme for a cash injection into a personal pension. You will take on all the investment risk. It is unlikely you will receive any additional contributions and you will bear all of the costs.

Personal Pension Plan to any company scheme. You cannot contribute to a personal pension once you have joined a company plan. Before you stick your money into the new scheme, check what the penalties are for stopping contributions to the personal pension. If they are unfavourable, find out whether the company may allow you to change the contract to an FSAVC without additional cost and avoiding any penalties.

Vivienne Starkey is an independent financial adviser at Haddock Porter Williams.

pensions made easy

WHEN you join a firm you may be invited to join its pension scheme (although under-25s are often excluded). Most employees should take up this offer, even if it means stopping a personal pension. The booklet provided by your company will tell you everything you need to know about the scheme.

Company pension schemes look complicated but there are only two sorts of scheme: final salary schemes ("defined benefit" schemes) and money purchase schemes ("defined contribution" schemes).

With a final salary scheme your pension will be related to your salary when you leave the company and to the number of years you have worked there. These schemes are expensive for the employer to run and are becoming less common outside the public sector since the employer takes all the risk.

Money purchase schemes mean you take the risk. The contributions are invested individually for each member and, at retirement, the value of the fund is used to buy a contract to pay you an annual income for life (a pension annuity). This is not ideal when (as now) interest rates are low: it means you get less income in retirement.

If you are not working for a company with a pension scheme you can take out a personal pension. These schemes are like money purchase arrangements for the individual. You cannot normally contribute to a personal pension and a company scheme at the same time unless you have another source of income. Company money purchase schemes have the edge over personal arrangements because they cost less and the employer makes a contribution.