Why pension transfers are so tricky

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City regulators are proposing new rules on pension transfers amid growing concern that savers are losing out. The Financial Conduct Authority (FCA) wants to impose new requirements on pension providers to offer more detailed information when savers consider transferring from one defined-contribution pension scheme to another.

Until now, the FCA has been most concerned about protecting savers with defined-benefit schemes (where pension benefits in retirement are guaranteed), for whom a transfer to a defined-contribution scheme offering no guarantees almost never makes sense. However, the regulator now believes many savers arranging supposedly more straightforward defined-contribution schemes may also be losing out.

Consolidating multiple pension pots

The intervention reflects huge growth in the defined-contribution sector, especially since the introduction of the auto-enrolment workplace pensions system. Many savers now have several small pots of pension savings, built up as they have moved from one employer to another, as well as when saving outside of work. Consolidating these small pots by transferring all or most of them into a single pension arrangement can be a good option for savers, who get economies of scale in a larger fund as well as the ease of having to track fewer accounts.

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However, the FCA’s research suggests most savers transferring pensions do not take independent financial advice, choosing a new provider for themselves rather than getting help to choose the best possible provider. “Few consumers who transfer consider factors such as fees and charges, investment choices, decumulation options or potential loss of guarantees or benefits,” the regulator warns. The cost of a misstep can be substantial, particularly given the wide range of charges made by different pension providers. The People’s Partnership found that a 30-year-old with average earnings who moves a £10,000 pot of savings away from a provider charging 0.4% a year to a rival levying 0.75% could end up with a final fund worth almost £33,000 less.

The not-for-profit financial-services business calculated that collectively, savers could eventually miss out on £1.7 billion owing to poorly informed transfers made over the year to June 2025 alone. Many savers also fail to identify benefits they are giving up and not replicating by moving provider, such as opportunities to retire at an earlier age or enhanced benefits for dependants. And some plans offer a much wider range of options when savers want to start drawing down income as they move into retirement. The FCA therefore plans to require providers to provide much more detailed information when a saver proposes to move a pensions pot to them, with data that enables more meaningful comparisons of the likely outcomes of the transfer, particularly in relation to charges. It believes the introduction of digital pension dashboards, through which savers will be able to see details of all their pension pots in a single online portal, will make it much easier for providers to offer useful information.

Experts are supportive of the proposals, but some had hoped the FCA would go further. In particular, the FCA has no plans to ban providers offering incentives to persuade savers to choose them, such as reduced upfront charges or even cashback benefits. Critics argue such incentives distort decision-making, blinding savers to the long-term impact of challenges such as higher charges.

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David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.