There are several reasons why individuals seek to transfer rights held in one pension scheme to another. These include:
- To access a particular investment or benefit payment option not available under the existing scheme.
- Consolidation of pension rights.
- Moving pension rights in response to moving to and from the UK.
Whatever the reason, understanding the tax implications of transferring is an important part of the advice process.
Transfers from a Registered Pension Scheme (RPS)
A transfer from an RPS will be an unauthorised payment unless it’s a ’recognised transfer’. For a transfer to be a recognised transfer the transferring rights must:
- become held for the purposes of the receiving scheme providing benefits in respect of the transferring member, and
- be transferred to either another RPS or a qualifying recognised overseas pension scheme (QROPS).
In most cases, a recognised transfer to a QROPS in respect of an individual under age 75 triggers a Lifetime Allowance test.
Another Lifetime Allowance consideration is where the transferring arrangement is defined benefit or cash balance and the receiving arrangement is not. The issue here arises because of the way the Lifetime Allowance test is carried out.
A transfer from a defined benefit or cash balance arrangement requires an adjustment to be made to the pension input amount (PIA) in the tax year of transfer.
Case study
Eva, 57, is an active member of a defined benefit (DB) scheme. She’s considering taking benefits before the end of the current tax year. The flexible retirement and death benefit options of a SIPP appeal to her and she wants to understand the pension tax implications if she transfers to a SIPP before immediately accessing benefits.
Pension accrued at the end of 2021/22 tax year was £35,000 p.a. Consumer price index (CPI) September 2021 was 3.1%.
Cash equivalent transfer value (CETV) is £1,012,500 and represents the actuarial value of the pension accrued at date of leaving, i.e., there’s no reduction or enhancement of the CETV.
Options under the DB scheme at date of leaving: pension of £37,500 pa or £187,500 PCLS and a residual pension of £28,125 pa (scheme commutation factor is 20).
Annual allowance: 2022/23 PIA for DB scheme
Opening value (OV) = 16 x £35,000 x 1.031 = £577,360
Pension accrued at end of 2022/23 is nil
Closing value (CV) = nil + (16 x £37,500) = £600,000
PIA = CV – OV = £22,640
2022/23 PIA for SIPP is nil, assuming no contributions are paid into the SIPP in the tax year
The calculation of the CV is adjusted to reflect the actual amount of accrued pension at the time of the CETV.
Lifetime Allowance: amount crystallised on taking benefits
DB scheme = £187,500 + (20 x £28,125) = £750,000
SIPP = £253,125 (PCLS) + £759,375 (drawdown) = £1,012,500
The PCLS available from the SIPP is greater when compared to the DB scheme. However, the Lifetime Allowance used up under the SIPP is also greater. This is because the CETV represents more than 20 times the pension accrued at date of leaving.
Where the transferring individual holds either enhanced or one of the forms of fixed protection, the transfer must be a ‘permitted transfer’ if they are to retain the protection.
To be a permitted transfer, the receiving arrangement must be under an RPS or a recognised overseas pension scheme and the value of the rights before and after the transfer actuarially equivalent. Where the receiving arrangement is money purchase (not cash balance) in type no further conditions apply. However, further prescribed requirements must be met where the receiving arrangement is defined benefit or cash balance.
A permitted transfer from a defined benefit or cash balance arrangement to a money purchase arrangement (not cash balance) triggers a test for relevant benefit accrual where enhanced protection is held by an individual. If relevant benefit accrual occurs, enhanced protection is lost. Relevant benefit accrual occurs when the amount transferred exceeds the appropriate limit as defined in legislation.
Transfers to an RPS
An RPS may accept a transfer from any type of pension scheme, that is:
- Another RPS
- UK pension scheme that is not registered
- Any type of non-UK pension scheme
Where the receiving arrangement is defined benefit or cash balance an adjustment is made when calculating the PIA for the arrangement in the tax year of transfer. The PIA is the difference between the CV and OV and the adjustment is made by subtracting the value of the pension rights secured under the receiving arrangement by the transfer from the CV.
Where the receiving arrangement accepts a transfer from a recognised overseas pension scheme, the transferring individual may be entitled to claim a Lifetime Allowance enhancement factor. The factor is referred to as a ‘recognised overseas transfer factor’.
A new arrangement made under the receiving scheme in respect of an individual other than for a permitted transfer results in loss of enhanced and all of the forms of fixed protection.
An individual with a protected pension age or scheme specific lump sum protection under a RPS in respect of pre 6 April 2006 rights may wish to ensure that the protection follows and the rights under the receiving scheme enjoy the same protection.
Where the transfer involves only part of the rights under the transferring scheme, i.e., a partial transfer, the transferred rights under the receiving scheme do not enjoy the same protection. Transferring all the rights held by the individual under the scheme by way of a ‘block transfer’ ensures that protection will be retained in the receiving scheme.
Summary
Transferring pension rights demands serious scrutiny as doing so is likely to be irreversible.
That being the case, it’s essential that individuals faced with such an important decision get access to advice that can be relied upon. This presents advisers with the challenge of ensuring that all relevant factors are identified to enable their clients to make well informed decisions.
John will be speaking at our next round of illuminate live events, which kick off on Tuesday 6 September in Glasgow. Find out more.