Adviser > Technical Central > Information & guidance > Transfers > Tax-free cash protection on transfer
Tax-free cash protection on transfer
Key facts
Tax-free cash protection is lost on transfer unless:
- it's a block (or buddy) transfer
- it's a wind-up transfer
- the member has registered for primary or enhanced protection.
Further information
Our article Tax-free cash protection on transfer - some common questions contains answers to the most common questions we receive on this subject.
Some members of occupational pension schemes, section 32 buy-out policies or deferred annuity contracts have an entitlement to more than 25% of their pre 6 April 2006 (A-Day) benefits value as tax-free cash. This can be lost on transfer.
Here we look at the types of transfer that allow this higher tax-free cash entitlement to be kept.
Scheme specific tax-free cash protection
If the member's tax-free cash entitlement at 5 April 2006 is less than £375,000 but more than 25% of the benefits value, it can be protected.
Protection means that the tax-free cash amount can be increased. Although the lifetime allowance reduced from £1.8 million to £1.5 million on 6 April 2012 the tax-free cash sum is still increased by 20% (1.8m/1.5m). If the LA increases to more than £1.8 million the tax-free cash will be indexed in line with the increases to the LA.
Post 6 April 2006 fund growth can also give rise to additional tax-free cash. See Protecting pre 6 April 2006 benefits.
Scheme specific tax-free cash protection is lost on transfer, unless it's a block (or buddy) transfer or a transfer on wind-up of a scheme.
Block (or buddy) transfer
A block (or buddy) transfer has a number of conditions:
- More than one member of the scheme must transfer at the same time to the same scheme. A transfer to a s.32 doesn’t meet this condition as you can’t have more than one member of a s.32. A group personal pension, personal pension, stakeholder pension or an occupational pension scheme under the same trust will usually meet this condition.
- ‘Same time’ doesn’t mean funds have to transfer on the same day, as long as the transfers are obviously meant to be part of the same transaction.
- All of the scheme benefits have to be transferred – a partial transfer doesn’t protect tax-free cash.
- The member must not have been a member of the receiving scheme for longer than 12 months unless that scheme is a personal pension (including a stakeholder pension) that has only contracted out rights.
If these conditions are met any pre 6 April 2006 entitlement to tax-free cash of more than 25% will be maintained under the new plan.
More than one block transfer at the same time
If a member has more than one pension plan with protected tax-free cash and they block transfer these benefits into the same pension scheme, they will not keep their right to the total tax-free cash amount.
Only one protected tax-free cash amount can be held in a scheme. Care needs to be taken where members have more than one protected tax-free cash amount, as a transfer to one scheme could significantly reduce their entitlement.
Example
(For simplicity, this example does not take into account any increase in benefits)
Transfer from an EPP – transfer value - £500,000, tax-free cash - £350,000 (70%)
Transfer from a CIMP – transfer value - £100,000, tax-free cash - £80,000 (80%)
Total value - £600,000
Tax free cash (assuming the higher protected amount) is £350,000, a drop of £80,000.
Subsequent block transfers
Where the block transfer conditions are met, further block transfers can be made without affecting the member’s tax-free cash entitlement.
Wind-up transfer
This is a specific type of transfer. For a transfer to be treated as a winding-up transfer a number of conditions must apply:
- the member has protected tax-free cash, and
- the existing scheme must be winding up, and
- the receiving scheme must be a deferred annuity contract, usually a Section-32 plan.
If all of the above conditions are met then any protected tax-free cash will be maintained under the new pension plan.
Primary protection
Scheme members who had a benefits value at 5 April 2006 of over £1.5 million can use primary protection to reduce or eliminate the chance that a lifetime allowance charge will apply.
If on the 5 April 2006 their entitlement to tax-free cash was less than 25% of the LA (< £375,000), the amount of tax-free cash available is 25% of the benefits value up to 25% of the LA when benefits are taken. In other words, primary protection doesn’t apply to the tax-free cash.
If on the 5 April 2006 their entitlement to tax-free cash was more than 25% of the LA (> £375,000) this entitlement is retained as a monetary amount. The amount payable when benefits are taken is the amount available at 5 April 2006 increased by 20% until the LA is more than £1.8 million when it will be indexed in line with increases to the LA. Members had until 5 April 2009 to register for primary protection.
Primary protection and transfers
If the member was entitled to less than 25% of the benefits value or LA as tax-free cash on 5 April 2006 and they transfer to another registered pension plan, the amount payable when benefits are taken will be 25% of the benefits value up to 25% of the LA (not the personal lifetime allowance).
If the member is entitled to tax-free cash of more than 25% of the LA, the entitlement will remain after transfer. The tax-free cash payable when benefits are taken will be the amount available on 5 April 2006 increased by 20% until the the LA is more than £1.8 million when it will be indexed in line with increases to the LA. See Protecting pre 6 April 2006 benefits for further information.
Enhanced protection
This provides full protection from the lifetime allowance charge when members come to take their benefits. There was no minimum benefits value at 5 April 2006 to register for enhanced protection.
Somebody applying for enhanced protection could also apply for primary protection if their benefits value exceeded £1.5 million on 5 April 2006.
If the member selected enhanced protection, in order to keep this they must either:
- have stopped paying into any money purchase scheme (excluding any on-going contracted-out payments to an existing scheme) from 6 April 2006, and/or
- build up limited benefits in the pension scheme on or after 6 April 2006 if members of defined benefit schemes or cash balance arrangements.
If the member has an entitlement to more than 25% of their benefits value as tax-free cash, but less than 25% of the LA on 5 April 2006 they can keep this. Their pre 6 April 2006 tax-free cash will be increased by 20% until the the LA is more than £1.8 million when it will be indexed in line with increases to the LA.
If the member has an entitlement to tax-free cash of more than 25% of the LA they retain this entitlement so that when they come to take their benefits their tax-free cash will be based on the same percentage of the benefits value as it was on 5 April 2006. Members had until 5 April 2009 to register for enhanced protection.
Enhanced protection and transfers
If the member was entitled to less than 25% of the LA but more than 25% of the benefits value as tax-free cash and the money is transferred to another pension plan, entitlement will be lost on transfer unless it is a block or winding up transfer.
If the member is entitled to tax-free cash of more than 25% of the LA, the entitlement remains after transfer. The tax-free cash will be the same percentage of the benefits value as it was on 5 April 2006.
Note that if tax-free cash entitlement is >25% of the LA AND enhanced or primary protection apply:
- the entitlement remains regardless of how many transfers are made, and
- the block/winding up transfer rules need not be met in order to retain the tax-free cash after transfer.
One final point to bear in mind...
As well as all the conditions explained above, the receiving scheme/insurer must be willing and able to accept the transfer.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.
In addition, the information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice.
Published 9 August 2006
Updated 5 April 2012
For professional advisers only
