C4.09 PENSION TRANSFERS SYLLABUS Right to a transfer Calculation of transfer values Transfer value analysis systems Discretionary increases Basis of assumptions Added years Access to transferred benefits Effect on allowances Effect on transitional protection Contracted out rights Transfer of benefits in payment Payment of transfer values Right to a transfer Generally, if a member of an occupational scheme has a right to a preserved benefit, he also has a right to require a transfer value to be made available, though there are exceptions to this rule In addition, a member leaving service after completing at least three months membership, but less than two years, may not be entitled to a preserved pension, but must be offered a transfer value reflecting the value of all his benefits The legal right to a transfer has some limitations, in particular, the member must have left the scheme at least a year before NPD (Normal Pension Date), and the right falls away at the later of: - the date one year before NPD; and - six months after leaving The trustees of the scheme can allow a transfer even after the member s right has fallen away however This includes the possibility of allowing a transfer after NPD, though the member could not insist on such a transfer The transfer can generally be to a personal pension (PP) or a specific transfer vehicle (often referred to as a buy-out policy) or an occupational scheme of which the individual is now a member Transferring may allow the member greater control and so may offer greater flexibility, particularly as regards the timing and or form of benefits However, HM Revenue & Customs (HMRC) requirements are now largely the same for all registered schemes There is generally no compulsion on a scheme to accept a transfer in (except where the receiving scheme is a Stakeholder Pension) In practice, many occupational schemes decline to accept transfer values from other arrangements Calculation of transfer values The transfer should represent the value of the member s benefits under the transferring scheme, calculated actuarially if the scheme is on a defined benefit (DB) basis)
This requires the scheme actuary to calculate the preserved pension payable at NPD, including any revaluation applicable The value of this as a lump sum must be determined, based on assumed annuity rates, then this is discounted back based on an assumed growth rate to find the current value of the benefit This is known as a Cash Equivalent Transfer Value (CETV) In the case of a defined contribution scheme, the transfer value will be based on the member s fund, after taking account of any exit charges or penalties Transfer value analysis systems Taking a transfer from a defined benefit scheme involves risk, since the benefits available from investment of the transfer value may not match those given up under the defined benefit scheme A Transfer Value Analysis must be undertaken where benefits are transferred from a defined benefit scheme to a PP or buy-out policy This is generally carried out on a computerised basis using a Transfer Value Analysis System (TVAS) The TVAS gives details of the critical yield ie the investment return necessary to match the benefits given up under the occupational scheme This calculation is done on a like for like basis, taking into account features such as escalation, survivor benefits etc If a feature cannot be matched, the comparison takes into account the value of the feature(s) in order to provide a valid comparison This might be necessary where, for example, the transferring scheme has a bridging pension but the receiving scheme cannot offer this The critical yield gives the individual and his advisers a guide as to whether the transfer is likely to result in potentially higher benefits the lower the critical yield, the more likely this is However, there may be other factors which are important in particular cases, for example flexibility of access, death benefits etc Discretionary increases If the scheme provides discretionary increases for pensions in payment, these may or may not be included in the calculation of the transfer value, at the trustees discretion This reflects the fact that there is no certainty that the scheme will still provide discretionary increases by the time the member retires, or if it does, at what rate The importance of this issue has reduced in recent years as a higher proportion of benefits involved in most transfer cases is covered by the Limited Price Indexation (LPI) requirements, and thus less by any discretionary increase provision Increases which are contractual (ie required by the scheme rules) or statutory (required by law) must be allowed for Basis of assumptions In the past, the basis of the assumptions to be used in calculating transfer values was set out in Guidance Note 11 (GN11), issued by the Institute and Faculty of Actuaries It did not precisely determine the assumptions to be used, and there remained variation between schemes The last government consulted on changes to the approach to calculating transfers and on a replacement for GN11, but consensus was not reached within the actuarial profession
A new approach was therefore introduced with effect from 1 October 2008, and this supersedes the GN11 guidance The new basis requires the trustees to adopt a scheme specific approach to the calculation Trustees are still likely to rely to a significant extent on advice from the scheme actuary, but as in other areas where they obtain advice, should be in a position to question, and possibly reject, that advice where appropriate Regulations require that the transfer value should reflect the expected cost of providing the pension, but taking into account the interests of those who remain members as well as those seeking to transfer The assumptions should be based on a best estimate of future conditions, including anticipated investment returns Transfer values can be reduced to reflect the position of the scheme if it is underfunded and can take account of reasonable administration costs Added years If a transfer is made to a new employer s scheme, it is up to the scheme to decide what benefits it will provide These may be on a money purchase basis, even within a scheme which otherwise operates on a defined benefit basis Some DB schemes (but by no means all) offer added years, where the transfer value will purchase an agreed number of extra years for benefit purposes (eg two extra sixtieths of final salary under a final salary scheme) The number of added years offered by the new scheme is usually less (sometimes considerably less) than the number of years of service in the old employer s scheme which gave rise to the transfer This reflects the fact that the transfer value is based on the value of the alternative preserved benefit, which would usually be revalued only in line with statutory revaluation On the other hand, the added years benefits would increase to reflect fully the individual s salary increases, which are likely to be assumed to be higher The effect would be reduced if the new scheme formula is less advantageous than the old, but would be increased if the new employment carries a higher pensionable earnings figure Added years can work well if the employee stays with the new employer for a long time and enjoys good salary increases However, added years will usually not be favourable if he leaves early, or is less successful than he hoped Many private sector employers are reluctant to offer added years because of the open-ended commitment involved Public sector schemes are often members of the Transfer Club which provides enhanced benefits on transfer between member schemes Generally, if the transfer is between schemes with equivalent benefit structures, the added years in the new scheme will equate to the years of service in the transferring scheme This is a considerably more generous basis than normally available in the private sector Access to transferred benefits Access to the transferred benefits reflects the rules of the receiving scheme HMRC requirements apply in the normal way and access is therefore potentially available at any time from the age of 55
Benefits can be taken on a phased basis if required, subject to the rules of the scheme However, many schemes, particularly occupational schemes have more restrictive conditions For example, many do not allow phased retirement and there may be a requirement that the member has left service before drawing benefits Under HMRC rules, access is available at any time in cases of incapacity with no minimum age requirement Where the individual s life expectancy is less than a year, all benefits can be taken as a lump sum In the past there have been differences in what was possible under PPs, buy-out policies and occupational schemes in this area However, these differences have not been retained under the simplified regime Where there is a GMP (Guaranteed Minimum Pension) benefit, this must be guaranteed at State Pension Age Therefore this may also restrict the availability of early retirement benefits, particularly where the GMP represents a substantial proportion of total benefits Transfer to a DB occupational scheme or a buy out policy retains the GMP in its original form, but transfer to PP sees it converted to Protected Rights, where the issue does not arise There are no special restrictions on access to Protected Rights, which is permitted from age 55 Effect on allowances Most transfers fall into the category of recognised transfers These are transfers from one registered scheme to another registered scheme in order to provide benefits for the same member If the transfer is from a DB or cash balance scheme, its value is taken into account in applying the annual allowance test under the transferring scheme in respect of the input period in which the transfer occurs If this were not the case, the possibility of a tax charge on a substantial input could be avoided simply by transferring If the transfer is from a DC (defined contribution) scheme, contributions paid to the scheme prior to the transfer would be tested in the normal way under the transferring scheme A transfer does not count towards the annual allowance test under the receiving scheme The transfer is not itself a benefit crystallisation event (BCE) and so does not trigger a test against the lifetime allowance When benefits do eventually crystallise, this will constitute a BCE in the normal way A transfer to a non-registered scheme is an unauthorised member payment and a 40% tax charge on the member results (an unauthorised member payment tax charge) There is also likely to be an unauthorised payment surcharge on the member at 15%, giving a total liability of 55% A scheme sanction charge would also arise, generally at 15% (assuming the member has paid the unauthorised member payment tax charge), payable by the scheme administrator A transfer to a qualifying recognised overseas pension scheme (QROPS) is not an unauthorised payment, but is a BCE, so a test against the lifetime allowance arises
A qualifying recognised overseas scheme is broadly one which provides benefits in a similar form to those under a UK recognised scheme A transfer to an overseas scheme other than a qualifying recognised overseas scheme is an unauthorised member payment Effect on transitional protection If rights are transferred between recognised schemes, there is no effect on primary protection under the transitional rules, so the protection continues to apply under the receiving scheme Enhanced protection is lost unless the transfer is a permitted transfer A permitted transfer must generally be to a money purchase scheme Also, in the case of a transfer from a DB or cash balance scheme, the transfer value must be actuarially equivalent to the value of the rights transferred Generally, if rights are transferred (from any type of scheme) to a DB or cash balance scheme, enhanced protection is lost An exception applies if rights are transferred from a DB or cash balance to another DB or cash balance scheme either where the transferring scheme is winding up and: - the new scheme relates to the same employment OR - the transfer is part of a relevant business transfer (where a business or part of a business is taken over by another business) Such a transfer is permitted without the loss of enhanced protection Scheme specific protection of lump sum rights (where the member has not registered for primary or enhanced protection, but had rights to a lump sum in excess of 25% on 5 April 2006) is generally lost on transfer It is retained however in the case of a bulk transfer of rights for more than one member to the same scheme at the same time, or a transfer to an insured contract on winding up Contracted out rights Contracted out rights can be transferred between registered schemes provided the receiving scheme is itself contracted out if an occupational scheme or is an Appropriate PP or Stakeholder pension GMP benefits will be treated as GMP benefits where the receiving scheme is a contracted out DB scheme or buy out policy GMP benefits transferred to a DC scheme will be treated as Protected Rights Protected Rights continue to be treated as Protected Rights after transfer Transfers of benefits in payment Transfers of benefits in payment are now permitted, though scheme rules may impose restrictions HMRC allow transfers whether the income is being paid by means of an annuity, scheme pension or drawdown arrangement Benefits in payment to the original member or those in payment to a dependant following the member s death can be transferred The transfer will be a recognised transfer subject to the benefits under the receiving scheme being in a form which remains consistent with the rules for registered schemes generally A recognised transfer is an authorised payment and does not give rise to the tax charges that would be associated with an unauthorised payment
Strictly where an insurer provides an annuity, this is outside of a registered scheme, and so any such transfer is outside the definition of a recognised transfer However a transfer to another insurer in these circumstances is treated in the same way as a recognised transfer Payment of transfer values Payment of transfer values must be made direct from scheme to scheme (or from insurer to insurer where the transfer is of an annuity in payment) Payment may be in monetary form or by transfer of assets (an in specie transfer) Transfers can be fragmented between a number of receiving schemes if required Partial transfers of uncrystallised rights are allowed, though this may be restricted by scheme rules in some cases