Transferring a pension scheme

• There is a difference in the FCA advice requirements in relation to transfers and HMRC requirements on how the actual transfer takes place.
  
  
• Most members have a right to transfer their pension arrangements, however, there are a number of exceptions
  
  
• No tax relief is allowable on the funds transferred from one registered pension scheme to another registered pension scheme (a recognised transfer).
  
  
• A transfer from a registered pension scheme to a vehicle that is not a pension scheme, to a UK pension that is not a registered pension scheme, or to a non-UK scheme that is neither a registered pension scheme nor a qualifying recognised overseas pension scheme, would be taxed as an unauthorised payment.
  
  
• If a member wishes to transfer out of their scheme then the member, given certain conditions, must be given a cash equivalent of their rights.

A transfer takes place when a member of a pension scheme transfers their accrued pension rights from one scheme to another.

There is a difference in the FCA advice requirements in relation to transfers and HMRC requirements on how the actual transfer takes place.

This article mainly focuses on HMRC aspects of the pension transfer and what is allowed or not allowed by legislation.

This article will also help you to identify the main types of pension transfer and help you identify which article you should refer to for further reading on the FCA requirements for each of the main transfer types. 

A pension transfer is the movement of safeguarded benefits to flexible benefits in a different scheme, as well as certain transfers of safeguarded benefits to other safeguarded benefits (such as transfers from safeguarded benefits in occupational schemes to safeguarded benefits in non-occupational schemes).

A pension conversion is a transaction resulting from a decision of a retail client to require the trustees or managers of a pension scheme to:

1. convert safeguarded benefits into different benefits that are flexible benefits under that pension scheme; or

2. pay an uncrystallised funds pension lump sum in respect of any of the safeguarded benefits.

A pension switch is where a transaction is not within the definition of pension transfer, but involves moving pension benefits from one scheme to another scheme of the same type. For example where a retail client is transferring benefits from a personal pension or stakeholder pension scheme (where there has been no previous transfer from a defined benefits scheme) to another personal pension/stakeholder pension scheme.

There can be a variety of reasons why a member would want to transfer to a different pension scheme. This could be due to a divorce where the funds are being reallocated to another scheme, moving overseas, financial planning reasons (such as accessing flexibility, early retirement, investment choice) or the scheme being wound up.

The reasons for a transfer will be client specific and the options available will be dependent on the scheme type. For further information refer to the articles  Pension Transfer and Conversion (including DB to DC transfer), Pension switches, Transfer to or from qualifying recognised overseas pension schemes (QROPS).

Dependent on the type of scheme, there are a variety of options available for such members:

• Preserved pension - this is where the pension fund remains where it is;
  
  
• Refund of contributions, but only in respect of membership of less than 2 years in a Defined Benefit scheme - please see details below;
  
  
• Vest benefits (this is only available if the member is over the age of 55 or satisfies the ill health conditions or has a protected early pension age). For information please see the article on When can retirement benefits be taken; and
  
  
• Transfer to an alternative pension scheme.

Changes to short service refunds for defined contribution occupational pension schemes

From 1 October 2015, members of occupational defined contribution pension schemes are no longer entitled to short-service refunds if they leave employment (or opt out) with less than two years qualifying service.

Short service refunds can only now apply to individuals who became members of an occupational pension scheme on or after 1 October 2015, or who re-joined an arrangement having already taken a refund or transferred out.

Those with less than 30 days service will still be able to request a short service refund of just their contributions. Defined Contribution Occupational schemes are now only able to make refunds within the first 30 days of membership. 

Defined benefit occupational pension schemes and personal pension schemes are not affected (short service refunds are only available to members of Defined Benefit schemes with less than 2 years qualifying service).

Defined benefit occupational schemes retain the facility to make short service refunds as these will not be within the scope of automatic transfers (covered next).

Personal pension schemes are not affected by this change of policy as they have never had the facility to make short service refunds

Most members have a right to transfer their pension arrangements, however, there are a number of exceptions, including:

• From April 2015 members of unfunded public sector pension schemes (including pensions for teachers, the civil service, the armed forces, and the police and fire services) are no longer able to transfer out, although some transfers to other unfunded public sector schemes may still be permitted. For example, the Local Government Pension Scheme (LGPS) is a funded arrangement so transfers from this scheme are still permitted.
  
  
• Within an occupational scheme no statutory right to transfer exists if the member is still an ‘active’ member and is still accruing benefits
  
  
• There is no statutory right to transfer in relation to non-flexible benefits (for example Defined Benefit types schemes) if the member is within 12 months of normal pension age. Any scheme wishing to offer a member the right to take a transfer of their DB benefits within 12 months of normal retirement age will need to provide a non-statutory right to transfer.
  
  
• The ‘within 12 months of retirement’ rule does not apply in respect of flexible benefits (defined contributions). Flexible benefits retain a statutory right to transfer up to normal retirement age.
  
  
• Within an occupational scheme no statutory right to transfer exists where a crystallisation event in relation to the benefits has taken place
  
  
• Section 32 buy-out plans where the fund value does not cover the Guaranteed Minimum Pension (GMP) entitlement revalued to age 60/65.

However, although most schemes provide the right to transfer, not every scheme has to accept an incoming transfer.

A stakeholder pension scheme is currently the only type of scheme which must accept any transfer from another registered pension scheme.

Although initially there were no transfers allowed out of The National Employment Savings Trust - NEST (except on the basis of ill health, or at retirement) these rules have changed. Providing the pension holder has stopped contributions they can transfer their NEST pot into another registered pension scheme or Qualifying Recognised Overseas Pension Scheme (QROPS).

There have been several measures introduced to provide additional protection for flexible pension consumers. You can read about the Guidance Guarantee and second line of defence - risk warnings requirements in our additional protection for flexible pension consumers article.  In addition to these protective measures, ceding trustees will also have additional responsibilities on outflow of pension funds.

To protect consumers who might otherwise lose valuable Defined Benefits, or some other types of guarantees (safeguarded benefits), the Government introduced a requirement that the ceding pension scheme must ensure individual scheme members have taken advice from an adviser authorised by the Financial Conduct Authority (FCA), before a transfer (or conversion) is allowed to proceed. But only where the value of benefits being given up is over £30,000.

For the avoidance of doubt, although the Department for Work and Pensions states that under £30,000 a ceding scheme does not have to ensure that a member has received advice, the FCA has no such ruling. Where an adviser is involved with the transfer or conversion of a pension they need to be appropriately authorised and qualified, irrespective of the value of the pension.

s48, of Pensions Schemes Act 2015

Where there are safeguarded benefits above the value of £30,000, the ceding trustees need to have hard evidence that the member has received advice in relation to any proposed transfer.

Evidence required by ceding trustee:

• that the adviser has permission to carry out the regulated activity in article 53E of the FCA's regulated activities order to provide advice on the transfer of safeguarded benefits
  
  
• the advice has been given on the transfer of safeguarded benefits to flexible benefits
  
  
• the name of the member that was given the advice and the scheme in which they hold safeguarded benefits
  
  
• the adviser's FCA Firm Reference number.

The Department for Work and Pensions issued a factsheet in January 2016 entitled ‘Pension benefits with a guarantee and the advice required’ which was intended to help pension scheme providers determine:

• whether certain types of pension benefits which contained a promise, including those with a guaranteed annuity rate (GAR), are safeguarded benefits for the purposes of the new advice requirement
  
  
• when the exception to the requirement to take independent advice for those with safeguarded benefits worth £30,000 or less applies.

Read the full factsheet Pension benefits with a guarantee and the advice requirement

In the factsheet they state Safeguarded benefits are defined in legislation as pension benefits which are not money purchase or cash balance benefits. In practice, safeguarded benefits are any benefits which include some form of guarantee or promise during the accumulation phase about the rate of secure pension income that the member (or their survivors) will receive, or will have an option to receive. These include:

1. Under an occupational pension scheme, a promised level of income calculated by reference to the member’s pensionable service in the employment of the pension scheme’s sponsoring employer (for instance, under a final salary scheme)
   
   
2. A promised level of income (or guaranteed minimum level of income) calculated by reference to the contributions or premiums paid by or in respect of the member (for instance, under some older personal pension policies)
   
   
3. A promised minimum rate at which the member will have the option to convert their accumulated pot or fund into an income at a future point, usually on the member reaching a particular age (generally known as a guaranteed annuity rate, or guaranteed annuity option).

A transfer from one registered pension scheme to another registered pension scheme is known as a recognised transfer. This is not a new contribution, so no tax relief is allowable on the funds transferred.

For annual allowance purposes, the treatment of the value is different depending on the type of arrangement. If it is a money purchase scheme (excluding a cash balance arrangement) then the transfer value is not included in the annual allowance calculation for the receiving scheme.

If there is a transfer of sums or assets (a ‘transfer payment’) from one registered pension scheme to another involving a defined benefits arrangement or cash balance arrangement, an adjustment is made to take account of the transfer payment.

In the case of a transfer-out from a defined benefits or cash balance arrangement, there is an adjustment to determine whether there is an increase in pension savings in the transferring arrangement.

In the case of a transfer-in to a defined benefits or cash balance arrangement, there is an adjustment to determine whether there is an increase in pension savings in the receiving arrangement.

Transfer out

The pension savings amount, or pension input amount, for the transferring scheme is valued by adding back to the closing value:

• in the case of a cash balance arrangement, the amount of the reduction in rights available to provide benefits under the arrangement relating to the transfer payment,
  
  
• in the case of a defined benefits arrangement, the amount of pension (and separate lump sum if applicable) that relates to the transfer payment.

Transfer in

The pension savings amount, or pension input amount, for the receiving scheme is valued by subtracting from the closing value:

• in the case of a cash balance arrangement, the amount of the increase in rights available to provide benefits under the arrangement relating to the transfer payment
  
  
•  in the case of a defined benefits arrangement, the amount of pension (and separate lump sum if applicable) that relates to the transfer payment.

Pensions Tax Manual PTM053710

A transfer is not a Benefit Crystallisation Event (BCE) unless it is an overseas transfer (see article on transferring to a QROPS).

                                                                                                                          Finance Act 2004
Section 188(5)

This is not a recognised transfer and therefore is an unauthorised payment. The member would incur the unauthorised payments charge of 40%, and probably the unauthorised payments surcharge of 15% as the unauthorised payments are likely to exceed 25% of the member's benefits under the scheme. The scheme administrator would also be liable for a scheme sanction charge of 40% although this would be reduced to 15% if the member's tax charge is paid (it may already have been deducted from the transfer payment). The transferring scheme could also be liable to a de-registration charge of 40% if more than 40% of the scheme was transferred.

As previously stated there is no tax relief on the transfer value as it is not a contribution.

For annual allowance purposes, if the transfer was from a defined benefit or cash balance arrangement then the amount transferred is not included in the closing balance. If it is a money purchase arrangement then it is not included as it is not a contribution.

It is not a BCE. The Scheme Administrator would need to complete an event report as it is an unauthorised member payment.

It is possible for a registered pension scheme to receive money from a non-registered pension scheme. Examples of this are where money is received from; an employer financed retirement benefits scheme or an overseas pension scheme (which is not a recognised overseas pension scheme, see below). As above, there is no tax relief on the contribution.

For annual allowance purposes, if the receiving scheme is a DB or cash balance scheme then the amount transferred or market value of assets will be deducted from the member's closing value in the arrangement. The transfer value is not counted for a money purchase arrangement as it is not a contribution.

There is no BCE.

Finance Act 2004
Section 188 (5)

If a member wishes to transfer out of their scheme then the member, given certain conditions, must be given a cash equivalent of their rights (although the assets themselves do not have to be cash but just have a cash value).

Section 94 The Pension Schemes Act 1993

Calculation of the Cash Equivalent Transfer Value (CETV)

For Defined Benefit schemes the calculation of the cash transfer sum was initially set out in The Occupational Pension Schemes (Transfer Values) Regulations 1996.

These Regulations were amended by the Occupational Pension Schemes (Transfer Values) (Amendment) Regulations 2008 and some substantial changes were introduced in the way that the transfer values were calculated. The initial cash equivalent must be calculated on an actuarial basis and this must take into account accrued benefits, any options and any discretionary benefits.

In summary, the process of converting a Defined Benefit into a CETV is as follows:

Step 1 - members preserved pension at date of leaving service is calculated,

Step 2 – the preserved pension at leaving is then revalued by statutory requirements/scheme rules to normal retirement age,

Step 3 - the capital cost of buying the revalued pension at normal pension age. This should be on the basis of reasonable annuity rates,

Step 4 - the capital cost at step 3 is then ‘discounted’ back to the present to provide its current capital value.

The trustees, acting on actuarial assumptions, must in relation to salary related benefits consider the financial, economic and demographic assumptions on which the initial cash equivalent is calculated. A minimum level is stated in the Regulations but trustees can pay out higher than the minimum level if the scheme rules allow this.

Deductions can then be made. The transfer regulations should mean that there is not much variation in transfer values. However, there is still scope within the regulations to allow a variation which could mean that there is a range of different transfer values for the same set of benefits. Some reasons for variation are;

• discounting rate - this is the assumed interest rate used to discount future benefits into current monetary terms;
  
  
• pension increases - it may be fairly simple to calculate statutory or guaranteed increases, but there may be discretionary increases which have to be factored in;
  
  
• underfunding – the trustees may reduce transfer values if the scheme is underfunded, to allow this a "scheme insufficiency report" has to be prepared by an actuary; and
  
  
• reinstatement – the scheme actuary has to be consistent in the methodology applied to incoming and outgoing transfer.

Reasonable administrative costs may also be deducted. The amount can also be reduced as a result of a criminal, negligent or fraudulent act or omission. The sum left is the cash equivalent.

The 2008 regulations also placed added disclosure obligations upon the trustees. The trustees must provide the CETV within 3 months and then the member has 3 months (from a guarantee date) in which to accept. If the member does not accept within the 3 month period then the amount is not guaranteed. If the member accepts the amount, a written application must be made to the trustees and this must be paid within 6 months of the guarantee date.

The Occupational Pension Schemes (Transfer Values) Regulations 1996 (as amended)

Money Purchase Schemes

For MP schemes the cash transfer sum is generally the fund value. Similarly to above, the member must receive this within 3 months although it is not normally guaranteed.

The Personal Pension Schemes (Transfer Values) Regulations 1987 (as amended)

Transfer of sums/assets held by registered pension schemes and insurance companies may take place where those sums/assets represent pensions in payment.

The Registered Pension Schemes (Transfer of Sums and Assets) Regulations 2006

When a member's crystallised rights are transferred from Scheme A to Scheme B, the scheme administrator of Scheme A must provide the scheme administrator of Scheme B with a statement showing the total percentage of lifetime allowance used up by the member under the scheme. This must be provided within 3 months of the transfer.

The Registered Pension Schemes (Provision of Information) Regulations 2006

Scheme Pension & Dependant's Scheme Pension

Where a scheme pension is in payment, a transfer of the sums/assets can take place providing the transfer value is used to provide a new scheme pension (i.e. it must be the same as the originating type on a 'like for like' basis). If the transfer is made on a 'like for like' basis, the member is not subject to a further benefit crystallisation event and is not able to take a further pension commencement lump sum.

A new scheme pension may be lower than the original pension in so far as the reduction reflects reasonable administration costs relating to the transfer. This is a permitted reduction. It is also permissible where the new scheme pension is payable until the later of the member's death and the end of a term certain (pension payment guarantee), for this term certain to end earlier than the one under the original pension scheme.

Where the transfer of sums / assets relating to scheme pensions does not meet the requirements under the regulations, the transfer is treated as an unauthorised payment made by the registered pension scheme that purchased the original scheme pension.

A transfer of sums/assets from a dependant's scheme pension between registered pension schemes is only treated as being a recognised transfer if those sums/assets are applied for the provision of a new dependant’s scheme pension.

Where the dependant’s scheme pension is being paid by an insurance company the amount transferred is treated as an unauthorised payment (made by the registered pension scheme that purchased the original dependant's scheme pension) if a new dependant's scheme pension is not provided.

HMRC Pension Tax Manual PTM107000

Transfer of Lifetime annuity

As with scheme pension, a transfer of the sums/assets can take place providing the transfer value is used to provide a new lifetime annuity (i.e. it must be the same as the originating type). The member is not subject to a further benefit crystallisation event and is not able to take a further pension commencement lump sum.

For a lifetime annuity, the conditions on transfer relate to the extent of the sums/assets applied to purchase the new lifetime annuity, which can be no greater than those transferred. This means it is possible, for example, to transfer from a variable annuity to an investment linked annuity and vice versa.

Where the transfer of sums/assets relating to lifetime annuities does not meet the requirements under the regulations, the transfer is treated as an unauthorised payment made by the registered pension scheme that purchased the original lifetime annuity.

Transfer of dependant’s annuity - entitlement arose after 6 April 2015

Following the transfer of a dependant’s annuity the new insurance company should also pay a dependant’s annuity. If this is not the case the scheme that provided the sums and assets to purchase the original dependant’s annuity is treated as having made an unauthorised payment. The amount of the unauthorised payment will be the total of the sums and assets transferred that were not used by the new insurer to provide a dependant’s annuity. Please note different rules apply to dependant’s annuities that arose before 6 April 2015.

Transfer of dependant’s annuity - entitlement arose before 6 April 2015

If the dependant became entitled to the original dependant’s annuity before 6 April 2015 the terms of the new annuity contract should not be capable of providing for decreases in the amount of the annuity other than those provided for by regulations. If the terms of the annuity contract are capable of providing for such decreases the new annuity is not a dependant’s annuity and the amount transferred would be an unauthorised payment.

In this context becoming entitled to the original dependant’s annuity before 6 April 2015 includes any of the following:

• the dependant became entitled to the transferring annuity before 6 April 2015;
  
  
• the transferring annuity derives from a transfer, or chain of transfers, relating to a dependant’s annuity to which the dependant became entitled before 6 April 2015;
  
  
• the transferring annuity was purchased together with a lifetime annuity and the member became entitled to the lifetime annuity before 6 April 2015. A dependant’s annuity is purchased together with a lifetime annuity if the dependant’s annuity is related to the lifetime annuity;
  
  
• the transferring annuity derives from a transfer, or chain of transfers, relating to a dependant’s annuity that was purchased together with a lifetime annuity to which member became entitled before 6 April 2015.

Post April 2015, an annuity contract is regarded as being capable of providing decreases to the annuity not only if this is explicitly provided for in the contract, but also if the contract terms allow for a future variation to be made to allow such annuity decreases.

Transfer of dependant’s, nominee’s and successor’s short-term annuities

Following the transfer the new insurance company should provide the same type of annuity. So a dependant’s short-term annuity should follow transfer of a dependant’s short-term annuity, a nominee’s short-term annuity should follow transfer of a nominee’s short-term annuity and a successor’s short-term annuity should follow transfer of a successor’s short-term annuity. If this is not the case the scheme that provided the sums and assets to purchase the original short-term annuity is treated as having made an unauthorised payment. The amount of the unauthorised payment will be the total of the sums and assets transferred that was not used by the new insurer to provide a dependant’s/nominee’s/successor’s (as appropriate) short-term annuity.

HMRC Pension Tax Manual PTM106000

Short-Term Annuity

A transfer is only allowed if another short-term annuity is provided. It is then treated as the original annuity for the purposes of Pension Rule 1 (retirement age and ill health).

Drawdown

The transfer of drawdown funds changed significantly with the introduction of the Taxation of Pensions Act 2014.

There are now various types of drawdown funds, including:

• member's drawdown pension fund (Capped drawdown established before 6 April 2015)
  
  
• dependant's drawdown pension fund (from a Capped drawdown
  established before 6 April 2015)
  
  
• member's flexi-access drawdown fund
  
  
• dependant's flexi-access drawdown fund
  
  
• nominee's flexi-access drawdown fund
  
  
• successor's flexi-access drawdown fund,

In respect of a Capped drawdown fund established prior to 6 April 2015 a transfer from that arrangement (“the old arrangement”) to a new drawdown arrangement can only take place if all of the sums/assets become held under a new drawdown arrangement that holds no other sums or assets  ("the new arrangement").  If this is not the case, the transaction is not a recognised transfer.

Essentially this means, whilst it is possible to use part of a drawdown fund to buy a lifetime annuity or scheme pension, it is not possible to transfer part of an existing drawdown arrangement to a new drawdown arrangement.  This legislative requirement applies to all types of drawdown transfer (ie capped, dependant’s, flexi-access etc listed above).

NB although some schemes may create several drawdown “arrangements” for the same client, perhaps through phased retirement transactions, they may apply stricter rules, eg their plan conditions may state all of a member’s drawdown plans and arrangements held in their scheme must be transferred out at the same time and to the same pension scheme.

Where the sums/assets are transferred to such a new arrangement, they are treated as remaining under the original arrangement on a "like for like" basis.

For example if a Capped drawdown is transferred it must be transferred to a new Capped drawdown arrangement, the new arrangement will be treated as if they had remained within the old arrangement for the purposes of:

• determining the pension year,
  
  
• determining the GAD review dates, and
  
  
• the annual amount of the relevant annuity (Max GAD)

Therefore, sufficient information (e.g. maximum pension, review dates etc) has to be obtained/provided in the case of an existing drawdown member transferring into another drawdown contract. See our Drawdown article for more on drawdown transfers.

In respect of Capped drawdown (plans arranged prior to 6 April 2015), if requested by the member or if the max GAD limits are breached, the plan will be converted to a flexi-access drawdown arrangement. The above also applies to dependant’s drawdown.

Finance Act 2004 Sch 28, Part 1 ss8
Finance Act 2004 Sch 28 Part 2 para 22

The member is not subject to a BCE in relation to the new drawdown arrangement nor are they entitled to any further PCLS. The provider would want to know details of the benefit crystallisation event, being the percentage LTA used and the amount that crystallised under BCE1. If the member subsequently purchases a lifetime annuity, scheme pension, or transfers to a Qualifying Recognised Overseas Pension Scheme (QROPS) a BCE 2, 4 or 8 is triggered, which is reduced by the amount previously crystallising under BCE1.

Further information on the LTA aspects of drawdown are in the Lifetime Allowance article.

Section 169(1) of Finance Act 2004    

A block transfer is where at least two members of a scheme transfer at the same time in the same transaction to another registered pension scheme. This is often known as a "buddy transfer". This applies to crystallised and uncrystallised rights. Any type of registered pension scheme may receive a block transfer.

This is important where a member has a Protected Lump Sum amount in their scheme and/or a Protected Early Pension Age. Previously if a single transfer took place these protections were lost. As such, without a second member also willing to transfer, current protection was lost. Although in some circumstances where the member has a protected age from the new minimum pension age of 57 an individual transfer can be conducted, and protection for the transferred amount from the ceding scheme will remain in the new scheme.

It is possible to "block transfer" from a section 32 or "assigned to life" plan started prior to A day to another section 32 post A day and keep any protection if certain conditions are met.

Block transfers are discussed more fully in the Protected Early Pension Ages article.

Paras 22(5 - 6) & 23(5 - 6) Sch 36 The Pension Schemes (Block Transfers) (Permitted Membership Period) Regulations 2006 - SI 2006/498

A member will lose protection for enhanced or fixed protection if a transfer is made which is not a permitted transfer. Lump sum protection may also be lost on transfer as mentioned above. This is discussed at length in the articles on these protections. Please see the Fixed Protection, Enhanced Protection and Tax-free cash and protection articles.

 [DM1]Added this link as made sense in the context of lump sums