A transfer takes place when a member of a pension scheme transfers their accrued pension rights from one scheme to another.
As mentioned in the article on Pension switches and transfers, there is a difference in the FSA advice requirements in relation to transfers and the HMRC requirements on how the actual transfer takes place. This article focuses on the HMRC aspects of the pension transfer and what is allowed or not allowed by legislation.
- Reason for transfer
- Types of Transfer
- Transfer to or from Qualifying recognised overseas pension scheme
- Mechanics of a transfer
- Transfers when pension is in payment
- Block transfers
- Transfers where the Member has protection from tax charges
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 or the scheme being wound up.
However, one of the most common reason for transfer is due to a member leaving the employment of an employer. 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 (this is only available to members with less than 2 years qualifying service);
- 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 Retirement Benefit Options); and
- Transfer to an alternative pension scheme.
In this article we are going to concentrate on what a transfer is and how it takes place.
All members have a right to transfer now. However not every scheme has to accept the transfer.
A stakeholder pension scheme is currently the only type of scheme which must accept any transfer from another registered pension scheme.
Recognised transfers from a registered pension scheme to another registered pension scheme
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 the transferring scheme is a DB scheme or cash balance arrangement then the amount transferred in the pension input period and the market value of any assets will be included in the closing value for the purposes of input calculation for the DB scheme. If the receiving scheme is a DB scheme then the amount transferred or market value of assets will be deducted from the member's closing value in the arrangement.
A transfer is not a Benefit Crystallisation Event (BCE) unless it is an overseas transfer (see below).
Finance Act 2004 Sections 169(1)(a), 188(5), 230 - 234 & 236
Transfer from a registered pension scheme to a non-registered pension scheme
This is not a recognised transfer and therefore is an unauthorised payment. The member would incur a charge of 40% and probably another 15% as the unauthorised payments are likely to exceed 25% of the members 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.
There is no tax relief 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.
Finance Act 2004 Sections 160(5), 188(5), 216
Transfer from a non-registered pension scheme to a registered pension scheme
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.
A Qualifying Recognised Overseas Pension Scheme (QROPS) is a recognised overseas pension scheme which has provided information and evidence to HMRC that:
- the scheme satisfies all the requirements as described for a recognised overseas scheme and has
- undertaken to notify the HMRC if the scheme ceases to be a recognised overseas scheme and supply them with information when making payments to certain scheme members.
The scheme must not have been excluded from being a QROPS. Exclusion may happen if the scheme fails to comply with any of the HMRC requirements. If this happens the HMRC must inform the scheme manager within 30 days. There is an option to appeal this decision.
HMRC have published a list of QROPS schemes on their web site. This list is published twice a month and should be checked before payment is made to an overseas scheme. A scheme's name will be deleted from the list as a matter of urgency if it ceases to be a QROPS. Due to HMRC confidentiality rules the list does not include those schemes which have not consented to go on it.
It should be noted that although a scheme may be recognised as a QROPS, local tax laws may not permit a transfer in. IRS rules in the USA mean that most schemes cannot accept a transfer in though there are US schemes on the QROPS list.
If a transfer payment is from a Recognised Overseas Pension Scheme (ROPS) or a Qualifying Recognised Overseas Pension Scheme (QROPS) the member can apply to HMRC for an enhanced Lifetime Allowance (LTA). The member must claim this enhancement no later than 5 years after 31 January following the tax year in which the transfer payment was made. It is the member's responsibility to ensure that he/she applies for the appropriate LTA enhancement. When an overseas transfer is received the scheme will normally write to the customer pointing out:
- they may be able to apply for an enhanced LTA if the transferring scheme was a ROPS or a QROPS
- the transferring scheme should be able to confirm if they are a ROPS or QROPS.
- they should speak to HMRC and/or a financial adviser about this.
Finance Act 2004 Sections 188(5) and 224-226
When there is a future benefit crystallisation event (BCE) the transfer payment counts towards the member's lifetime allowance (LTA) in the same way a transfer in from a UK scheme would.
A transfer out to a QROPS is a benefit crystallisation event so any transfer value in excess of the available LTA will be subject to a 55% tax charge, find out more in our Lifetime Allowance article.
See detailed information on QROPS.
If a member wishes to transfer out of their scheme then the member 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 is 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. 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. The four main reasons for variation are;
- assumed discounting rate - this is the interest rate used to discount future benefits into current money;
- 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 - a scheme insufficiency report has to be prepared by an actuary; and
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). 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 dependants scheme pension.
Where the dependants 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.
Lifetime annuity and Dependant's 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.
Where a dependant's annuity is reduced/stopped due to a transfer of sums/assets and a new dependant's annuity is not payable in relation to the transferred amounts, the value of the transfer is classed as an unauthorised payment made by the registered pension scheme that purchased the original dependant's lifetime annuity. The same is true in relation to a dependant's short-term annuity.
In practice transfers of annuities in payment are rare as there are very few annuity contracts which actually allow the annuity to be transferred out. Unlike accrued benefits there is no right to a transfer from an annuity contract.
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).
A transfer from a member's/dependant's drawdown fund can only take place if all of the sums/assets become held under another drawdown fund in which no other sums/assets are held.
Where the sums/assets are transferred to such a new arrangement they are treated as remaining under the original 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 also Retirement Benefit Options for transitional rules on drawdown transfers.
Drawdown transfers must take place on a like for like basis. For example a member in capped drawdown can only transfer to capped drawdown and a member in flexible drawdown may only transfer to flexible drawdown. However, in practice if a member wanted to transfer and move into flexible drawdown then they would complete a capped to capped drawdown transfer and then move in flexible drawdown. If a member has satisfied the flexible drawdown requirements with one provider then they are held to still satisfy them if they transfer.
Drawdown transfers are discussed in detail in Retirement Benefit Options article as there are transitional arrangements in place since 6 April 2011.
The member is not subject to a BCE in relation to the new drawdown nor are they entitled to a subsequent lump sum. 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 or scheme pension, a BCE 2 or 4 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(1D) and (1E) of Finance Act 2004 and The Registered Pension Schemes (Transfer of Sums and Assets) Regulations 2006
A block transfer is where 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. If a single transfer takes place these protections are lost.
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 is 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 and Enhanced Protection articles.