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Just because you’re already retired and drawing money from a pension doesn’t mean you can’t increase the cash in your pocket by moving to a lower-cost self-invested personal pension (SIPP).

In many cases you still can. Better late than never, as this previous article explains.

But it’s also never too early to change pension provider. In fact, the sooner you do it, the better, potentially, for you – whether that’s earlier in your working career, earlier in your retirement or earlier in the tax year. In this article, I explain why.

The longer you save, the more you save

Firstly, the earlier you reduce your investment costs, the greater the potential saving. 

According to a government survey published last year, average pension fees in the UK range from 0.48% to 0.92%, depending on the type and size of scheme1.

The Vanguard Personal Pension (or SIPP) has an account fee of just 0.15% on the first £250,000 and thereafter no fees. And that’s not all because differences in fund fees and other hidden costs could yet make the total difference add up to well over 1% or more.

To illustrate how much you could save and what it might mean to your retirement earnings, here’s a basic example: imagine that by switching to a low-cost pension provider you could save 1% of your annual investment costs. Based on a £100,000 pot this would equate to £1,000 a year, which invested and earning a hypothetical average return of 5% per year would total well over £12,000 over a period of 10 years – £10,000 of invested capital plus £2,288 of accumulated returns2, to be precise.

Potentially, that’s a handy sum of extra money to have at a time when the cost of living is rising. It shows the power of compounding as your investment returns each year build on earlier returns.

Just be aware before initiating a transfer, though, that many pension funds charge exit fees (Vanguard doesn’t). If your current provider does, please factor them into your calculations.

Get on it, get organised, get ahead

What if you have several pensions? Research suggests people on average will typically have 11 or 12 different jobs over the course of their lifetimes3. This suggests they may pick up a lot of pension pots along the way, including some they may mentally mislay – especially if home addresses and emails have changed.

If that includes you, how long can you afford to do nothing about it? Given the Department for Work and Pensions provides a service that can help you track them down, what’s stopping you? After all, this may be money that has been invested for several years, so you may be pleasantly surprised about how much is sitting in these half-forgotten pots. 

If any are defined benefit (DB) schemes, they are probably best left alone since they pay a guaranteed income4. But the quicker you can bring all your other (defined contribution or DC) pension pots together, the faster you’ll gain greater clarity over your finances, the charges you pay and the returns you can earn, which will improve your financial planning.

It could, for example, help you spot any potential funding shortfalls, so you can address them before it’s too late. And if you’re semi-retired it could stop you accidentally reducing the tax-relief you could earn on future pension contributions by taking too much from one of your smaller pots5, as my colleague Zoe Dagless recently explained.

Having your pensions in one place and paying just one fee makes things simpler. It can also stop you from making potentially expensive mistakes. For example, it can ensure you don’t exceed the government’s lifetime allowance for pension savings – currently £1,073,100. If all your pension savings are in one place, your pension provider will be able to warn you when you are approaching this limit so you can avoid the tax charges you would have to pay is you exceeded it.

In short, if you have everything in one place, it’s easier to keep track of your pension finances. It’s also easier to plan how you might want to withdraw your pension money. 

It used to be the case with your DC pension that you had to buy an annuity providing a guaranteed lifetime income. But these days, you can get a tax-free cash lump sum worth 25% of the total from as early on as aged 55 (rising to 57 in 2028).

And you can withdraw your money flexibly by keeping your pension savings invested while gradually taking an income – whether on a regular, scheduled basis or in smaller lump-sum form, as and when you need it.

But not all DC schemes allow flexible drawdown. As this was only introduced in 2015, some older schemes are not set up for it and offered only ‘capped drawdown’, which limits the amount you can take out. This option no longer became available after 2015 when flexible drawdown was introduced.

It’s more reason to find out exactly what you do have and consider moving to a low-cost SIPP soon.

Steer clear of traffic for a smoother transfer

That said, when in the tax year should you do it? We estimate that most transfers take around 30 business days to complete. However, some can take longer – perhaps 10 weeks or more in some cases. So to avoid hold-ups, it’s probably best to initiate a transfer in the first three quarters of the tax year rather than, say, the last one as other transfers could pile up in the run up to the busy tax year-end.

That doesn’t matter so much for the older pension pots you are trying to bring together but no longer pay into, such as workplace schemes from previous jobs, as these are not part of your yearly tax-free allowance calculations. But for those pensions into which you do still pay, including SIPPs, you probably want to ensure you can continue maximising the tax-relief you can get on your pension contributions – currently up to 100% of your earnings up to a maximum £40,000 a year.

So if you have unused allowances for the current tax year (or previous three tax years), you want to make sure you give yourself enough room to continue taking advantage of that once you move to a new provider.

And finally, if you are in drawdown, it may be smart before initiating a transfer to make sure you have enough money to tide you over for a few months while your pension transfer is taking place., just in case. It’s also important to factor in your personal tax allowances to ensure you don’t miss out if transferring close to a tax year end.



1 Pension charges survey 2020 – summary’, 13 January 2021

2 Vanguard calculations.

3 ‘Small pots working group report' , December 2020

4 Transferring a DB pension – and losing the guaranteed income and other possible benefits – would usually be a mistake. You should certainly seek advice before doing so.

5 Unless worth less than £10,000 in total, taking more than the 25% tax-free entitlement from any pot would trigger what is known as ‘Money Purchase Annual Allowance.

Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Eligibility to invest in a Vanguard Personal Pension depends on your individual circumstances. Please be aware that pension and tax rules may change in the future and the value of investments can go down as well as up, so you might get back less than you invested. You cannot usually access your pension savings or make any withdrawals until the age of 55.

If you are not sure of the suitability or appropriateness of any investment, product or service you should consult an authorised financial adviser. Please note this may incur a charge.

Important information

This article is designed for use by, and is directed only at, persons resident in the UK.

The information contained in this article is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.

The information in this article does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this article when making any investment decisions.

Issued by Vanguard Asset Management Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.

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