AJ Bell pensions expert Tom Selby looks at the case of a reader looking to switch to a different provider
Thursday 25 Mar 2021 Author: Tom Selby

I have had a crystallised pension fund since 2014 and to date I’ve not had to take any taxable income from the fund. Can I transfer the fund without any tax implications?

Peter


Tom Selby, AJ Bell Senior Analyst says:

Regardless of whether your fund is ‘crystallised’ – meaning you have picked a retirement income route such as drawdown or buying an annuity – or ‘uncrystallised’, there should be no tax implications when transferring to a different UK pension provider. Once you do choose to crystallise your pot, 25% will usually be available tax-free, with the rest subject to income tax.

Check to see if there is an exit fee before you transfer. Similarly, some older types of pensions, such as with-profits policies, will charge a penalty if you leave before a certain date specified in your policy documentation. This is sometimes referred to as a ‘market value reduction’ or MVR.

In addition, some policies have valuable guarantees attached which you may lose if you transfer to an alternative provider.

For example, pensions which promised to pay a set annuity rate from a specific date, known as a ‘guaranteed annuity rate’ or GAR, were relatively common in the 1980s and 1990s.

This annuity rate will often be much more generous than you could buy from an insurance company on the open market, so giving it up may be a significant financial decision. It is for this reason that the Government insists anyone with a guaranteed annuity rate policy worth £30,000 or more takes regulated independent financial advice before transferring.

If your fund is in drawdown and you transfer to a new drawdown provider, you will be offered the option of choosing one of four ‘investment pathway’ investments.

Investment pathways were introduced by the Financial Conduct Authority in February this year, with the aim of encouraging more people to engage with their funds in drawdown and not hold large amounts of cash over the long-term.

If you transfer to another drawdown provider, you will initially be given the option of choosing an investment pathway, choosing your own investments or sticking with the investments you already have.

If you opt for the investment pathway route, you will be offered the choice of four options. These will not be tailored based on your personal circumstances, but rather designed around four very broad retirement income objectives.

Option 1: I have no plans to touch my money in the next five years

Option 2: I plan to use my money to set up a guaranteed income (annuity) within the next five years

Option 3: I plan to start taking my money as a long-term income within the next five years

Option 4: I plan to take out all my money within the next five years

If you choose an investment pathway it will still be crucial to monitor your investments and income withdrawal strategy regularly.


Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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