Stick, twist or switch?

The fifth in our series on pensions explores your options when you change jobs; The pensions mis-selling scandal was in large part about people being wrongly advised to transfer from final salary schemes

WHEN you leave a job your pension is rarely the top priority. But an important question does arise. What should you do with your accumulated pension rights? There are three options: leave your pension where it is, transfer it to your new employer (if the new employer is willing to accept a transfer-in), or transfer to a personal pension plan.

Deciding the best course of action can be tricky - and don't rush your decision.

Your accumulated pension rights are expressed as a transfer value. It's a lump sum payment your previous employer is willing to make (though not so as you can get your hands on it directly).

With a transfer value from a scheme where your pension is related to pay - called a final salary scheme - the value is based on a number of assumptions about inflation, investments and so on. The theory is that the lump sum should be sufficient if invested elsewhere to produce the same pension income as that given up under the existing scheme.

If you think the value is too low, it might be worth paying for a second opinion from a pensions specialist. For example, you might think the actuary has assumed overly high investment returns in the future, which means a smaller transfer value now.

And if it's impossible to increase the transfer value, you may be better off leaving the pension where it is.

When, instead, your old employer's scheme is a "money purchase" scheme, where the eventual pension is determined by the invested value of your fund and not directly related to your pay, the transfer value is simply the current value of your fund.

If you're thinking of transferring to your new employer's scheme, then, if it is of the final salary-related variety, that scheme's actuary has to work out how many years' membership of the scheme your lump sum will buy.

For several reasons, the number of years in the new scheme can be fewer than you are giving up in the old scheme. The value of each year in the new scheme may be different and you may well be starting at a higher salary in the new job. This affects the actual pension when it is a proportion of pay. The new scheme may have a different retirement age. It may have additionaI or different benefits. And assumptions are made about what you might be earning just before you retire.

If you're transferring to a personal plan or a "money purchase" employer's scheme, you simply transfer and invest the lump sum. The key question is whether the expected rate of return of the new arrangement will produce a bigger pension than you'd get by leaving the money where it is.

Expert advice is essential. The recent pensions mis-selling scandal was in large part about people being wrongly advised to transfer their accumulated rights from generous final salary employers' schemes to riskier personal pension plans.

Bear in mind that you will will lose some of your transferred lump sum immediately in charges levied.

You may prefer the guaranteed benefits of the old employer's pay-related pension to the unknown and unpredictable benefits of a personal plan or money purchase scheme. Note too that, by law, the former will be increased by inflation of up to 5 per cent before you retire.

The decision on whether to transfer may depend on the benefits of different schemes, especially with final-salary plans. For example, one scheme may have a better record of giving inflationary increases after retirement.

But if you expect to stay with the new employer for several years or to get rapid promotion, the value of each year's membership bought by the transfer may be greater than having a "deferred" pension in the old scheme.

Pensions are complicated and no more so than when it comes to transfers - there are all sorts of wrinkles. For example, many employers' schemes are contracted-out of Serps - the state earnings-related pensions scheme. This can affect how any deferred pension is revalued to take account of inflation.

If you've been a member of a scheme for less than two years you'll probably be offered a refund of contributions, possibly with interest but less a deduction for tax. You cannot get a refund after two years.

Finally, remember that when you join an employer's scheme, you may have the option of transferring funds from a personal plan into the scheme.

Pensions transfer advice can be obtained from a member of the Society of Pensions Consultants. For a list of members, write to Ludgate House, Ludgate Circus, London EC4A 2AB (0171-353 1688).

Alternatively, try the Association of Consulting Actuaries, 1 Wardrobe Place, London EC4V 5AH (0171-248 3163).