Here we answer a few common questions we are asked about pension transfers.
Q: What transfer permissions apply for a payment from an AVC scheme, which does not contain any safeguarded benefits, to a personal pension plan?
A: From 1 October the definition of a pension transfer in COBS was amended so that transfers not containing safeguarded (or the potential for safeguarded benefits) no longer qualify as a pension transfer and can now be treated as a pension switch. Therefore, investment advisers can advise on these with no firm level transfer permissions required.
Previously, for occupational schemes without safeguarded benefits, the individual giving advice did not have to hold a pension transfer specialist qualification (PTS), the adviser firm must have held the relevant transfer permissions to allow them to conduct this type of transfer business.
Q: Can a ceding scheme transfer a pension fund which contains non equalised Guaranteed Minimum Pension (GMP)?
A: For a transfer to personal pension the member gives up the right to any GMP so, currently, there is no legislative reason stopping this transfer payment. Although you should be aware this position is fluid following the High Court ruling in October 2018. This determined that pensions provided to members who had contracted-out of their scheme must be recalculated to ensure payments reflect the equalisation of normal retirement ages in the 1990s.
The court didn’t set a definitive method for equalisation and, with several possible methods being available, an industry group was set up to help pension schemes in this task. The group have issued a guidance note outlining good practice on achieving GMP equality.
Q: What happens to GMP on transfer to a personal pension scheme?
A: The entitlement to guaranteed benefits is lost. The entire transfer value is simply converted to ordinary rights when the payment is accepted by the receiving scheme.
Open Market Option (OMO) vs Transfer
Q: Can any provider accept an open market option (OMO) transfer into drawdown?
A: No, HMRC rules do not allow this. Legislation will only allow an OMO payment to buy an annuity.
A scheme can only accept a transfer if it is paid as a drawdown to drawdown transfer. If the transferring scheme pay the pension commencement lump sum, then they usually put the balance into drawdown in their scheme, then make the transfer payment.
Please note, whilst scheme rules may not allow all HMRC pension freedom payment options, the trustee/ administrator may choose to use a permissive override allowed by HMRC (Finance Act 2004, Section 273B). This is not mandatory and any scheme may be unwilling or unable (perhaps due to system/ plan constraints) to apply the override.
Where the override is applied, this effectively permits the scheme to make certain payments allowed by HMRC even where the scheme rules are more restrictive and would prevent such payments. For example, “blink of an eye” drawdown may be possible, so that the tax free cash could be paid by the scheme with the balance of fund being ‘notionally’ designated to drawdown. There is no drawdown plan/ contract actually set up in the original scheme but instead an immediate drawdown to drawdown transfer takes place to another pension scheme chosen by the member. The result is the member does not lose out on protection as this transaction meets the condition, applying to pre A-day tax free cash and early pension age protections, which states all benefits must be put in to payment at the same time.
Exit charge cap
Q: When was the 1% exit charge cap introduced?
A: 31 March 2017 for personal pensions. The cap applies for all members joining on or after this date and for pre 31 March 2017 members who have reached normal minimum pension age or their protected early pension age. Read more in FCA Policy Statement PS16/24.
1 October 2017 for occupational pensions. The cap applies for all members joining on or after this date and for pre 1 October 2017 members who are eligible to access pension freedoms. Read more in Statutory Instrument SI 2017/774 made July 2017.