Pension transfers after A-Day
I’ll just dive in to the subject and see if I can get you up to speed with why I think transfers of pensions after A-Day are going to be much more difficult than they are now (not that they’re easy now, I know).
The thing is, many people in occupational pension schemes today are entitled to more than the 25% tax-free cash that will be the post A-Day maximum. Quite a few people in specialist occupational pension schemes like Executive Pension Plans (EPPs), Small Self-Administered Schemes (SSASs) and Section 32 buy-out bonds (S32s) are in such schemes for this very reason. But it’s not just them. Ordinary people in ordinary company pension schemes may well be better off tax-free cash wise with the current rules rather than the new post A-Day rules.
When A-Day eventually gets here most regular BeeLiners will be aware that the changes to the tax laws it brings with it are going to act retrospectively - a first for UK pensions. It is for this reason that the Inland Revenue eventually relented and allowed people caught out by the £1.5 million Lifetime Allowance (the new maximum pension savings pot allowable) to ‘protect’ their accrued pensions from retrospective taxes. If you’re interested there’s an item on our Technical Central website that gives details of how this type of protection affects tax-free cash. You can access it .
But, you may also be aware that they have not required all the people caught out by losing some of their tax-free cash to register that for protection on A-Day too even though it was considered at one stage. There is nothing to worry about on this score though, what they’ve written into the Finance Act automatically grants ‘protection’ to tax-free cash amounts above the new 25% limit where schemes already provide it. So an ordinary member of an ordinary pension scheme who isn’t ever going to get anywhere near the £1.5 million Lifetime Allowance doesn’t have to bother to apply for protection for his or her tax-free cash rights accrued before A-Day.
Neat and tidy as that seems at first glance, it’s not quite so straightforward when you look a little deeper into what things will really be like after A-Day. What actually happens is that it is the scheme, the EPP, SSAS or S32 whatever, that is allowed to provide the extra tax-free cash after A-Day. It’s not that the member is entitled to it.
I know that’s got “So what?” written all over it and “Who really cares whether it’s the scheme or the member if the result’s the same?” but let me keep struggling on with it for a bit. The thing is if the person goes on after A-Day to leave that scheme and transfer to another then the right to the extra tax-free cash won’t go with them. It would have been the scheme they left that was allowed to provide the extra tax-free cash – not the scheme they subsequently transferred to.
So, if people are currently entitled to more than 25% tax-free cash at retirement and they are toying with the idea of transferring their pension holdings to another pension scheme, like a Section 32 buy-out bond, one day, then they’ll have to get a move on and look into doing it before A-Day or they could end up being restricted to just 25% tax-free cash when they eventually retire.
I feel a plain English example coming on. Someone with a deferred occupational pension which allows, say, 30% of tax-free cash at retirement wants to transfer to a Section 32 scheme. If they do so before A-Day then that Section 32 scheme will retain the right to pay out 30% tax-free cash. If they do it after A-Day the Section 32 scheme won’t be able to pay out any more than 25% tax-free cash. In both cases if they had stayed in their original scheme as a deferred member that scheme itself would have retained the right to pay out the 30% tax-free cash. Got it? People don’t have to transfer to ‘protect’ their tax-free cash, but if they do transfer they’ll need to do so before A-Day. Put another way, I guess people will have to get used to the idea of staying put in whatever scheme they happen to be in on A-Day if they want to retain any tax-free cash entitlements that are currently more generous than 25%.
This doesn’t seem to me to do anything than make post A-Day transfers even more difficult than they are at the moment. For a start, everyone who considers transferring will need to check that they aren’t going to be giving up valuable tax-free cash rights if they do so. Now I can imagine advisers asking potential transferees if they have any such retained rights attached to their pre A-Day pension accruals, but I can’t imagine more than one in a million people knowing what the hell it is their adviser’s talking about. Particularly as they will also need to weigh-up the real value of the loss as it will only apply to pre A-Day accruals and not post A-Day accruals. In fact, as things move on I doubt anyone will really know what’s going on anymore with their tax-free cash in this supposedly simplified regime we’re having foisted on us. It looks to me as though there will be a fair amount of transferring around going on from occupational pension schemes before A-Day and things will grind to something of a halt on the occupational pension transfer front soon after.
But it’s not just transfers from deferred membership to individual pension schemes that go on is it? Many people joining a new employer’s pension scheme may well find they have the option of transferring their old pension pots into that scheme. Indeed the trustees or scheme administrators may well offer it to all new entrants as an option when joining the new company. These people will have to be careful too, because those transferring may be unaware that they stand to lose valuable rights by transferring that they could have retained by leaving their deferred pensions where they were with their old employer’s scheme. They’ll have to be doubly careful because such ‘pension transfers’, that have been happily going on between occupational schemes for the last forty years or so, don’t usually come with the benefit of individual advice. They never have. But now there is a real chance that after A-Day valuable ‘protected’ tax-free cash rights could be overlooked and lost during the seemingly simple process of tidying up your pension rights. This is something else all those running occupational pension schemes right now will need to give some thought to when they are looking at their post A-Day policies and practices.
As you’d expect, the Inland Revenue have put some wording in the Finance Act to cover the ‘bulk transfer’ scenario, say when a scheme closes or otherwise changes. Really though, I think that they had to otherwise there would be chaos if this so-called ‘protection’ was lost because employers chose to restructure their schemes. In the Act a ‘bulk transfer’, they call it ‘block’ by the way, is actually defined as a transfer “made which relate to the member and at least one other member of that pension scheme”. Now, I’m not sure what this actually means or what abuses it might be open to. No doubt, another aspect to cover for you in future BeeLines.
Anyway, if nothing else you’ll hopefully now see why I couldn’t work out whether I was writing about pension transfers or tax-free cash ‘protection’ when I first started hitting the keys about half an hour ago…
2 November 2004
This information is based on our current understanding of the Finance Act 2004.