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DB transfers – two things to think about

Published  06 April 2023
   6 min read

Advisers are receiving an increasing number of requests from clients looking to transfer their pension from defined benefit schemes to personal pensions.

Key facts

  • Defined Benefit pensions are normally valued for the lifetime allowance by multiplying the expected annual pension by 20.
  • If the tax-free cash is provided by giving up pension it is added to the pension value.
  • Since 17 May 1990 (Barber v GRE) the scheme retirement ages for men and women should be the same.
  • The value of the contracted-out funds being transferred must be greater than the cost of providing the GMP, otherwise the transfer can’t go ahead.
  • A defined benefit to defined contribution transfer can result in a higher valuation for lifetime allowance purposes

Equalisation of pensions

Prior to the Barber case in 1990, defined benefit pension schemes typically provided pensions at age 60 for women and age 65 for men.  After Barber, schemes had to change their rules so benefits were paid at the same age for men and women. They could be equalised at the higher age or any age between the two ages but until a pension scheme got round to changing their rules, they were deemed to be equalised at the lower age. 

The scheme rules will state the legal process by which the rules can be changed. So, if the proper process isn’t followed, it could be that the scheme thinks it’s equalised at say age 65 when in fact it could be that the lower age applies. 

Most providers need confirmation that benefits in the scheme have been equalised before the transfer can go ahead, otherwise the transfer value may not reflect the correct value of the benefits.

Usually it’s a formality but sometimes the ceding scheme isn’t able to provide the necessary confirmation and the transfer can’t go ahead.

Guaranteed Minimum Pension (GMP)

Defined benefit schemes which were contracted-out before 1997 must provide a GMP roughly equivalent to the earnings-related State pension the member would have received if they’d stayed in the State scheme.

This runs alongside the scheme pension and at age 60 for women or 65 for men, the higher of the two pensions has to be paid.

In a transfer, the cost of the GMP at the relevant age has to be covered by that part of the transfer value monies that can be used for this purpose. Often it’s not, because the cost doesn’t actually have to be met until age 60/65.

Post-1997 funds (when GMP stopped accruing) and additional voluntary contributions can’t be used to cover the GMP cost. So just because the total transfer value is higher than the GMP cost at age 60/65 doesn’t necessarily mean that the part of the transfer value that can be used to cover it (sometimes known as the reserved amount) is high enough.

If the GMP cost isn’t covered, the transfer can’t happen. The receiving scheme needs confirmation that the GMP cost at 60/65 is covered by the reserved amount.

If the cost isn’t covered the transfer can’t go ahead unless the ceding scheme is willing to increase the transfer value to the point that it is covered.

HMRC Guidance - Transfer your scheme member’s contracted-out pension rights

The Lloyds Banking case 

Lloyds Banking Group Pensions Trustees Ltd v Lloyds Bank plc and others

As you will be aware the above case was looked at by the High Court, the initial decision on 26 October 2018, confirmed that GMPs do have to be equalised and a decision for the Lloyds Banking Group Pension has been given.  A further decision was made on 20 November 2020 on previous transfer payments. 

These articles by Sackers & Partners LLP gives some background to the case.

The Pensions Administration Standards Association’s GMP equalisation working group have produced the following:

GMP Equalisation – The Pensions Administration Standards Association

Disclaimer

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. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

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.