In-specie transfers and contributions - what's the difference?
Learn what an in-specie transfer is, how in-specie pension transfers and contributions work, and the key differences between them. Understand ownership changes, tax treatment, annual allowance implications, costs and valuation requirements for pension scheme assets.
Key facts
- In specie transfers can involve shares, property, or funds.
- Ownership is transferred from one pension scheme to another.
- No dealing costs are involved, but either or both the ceding and receiving schemes could charge for the work involved in the transfer.
- As they are transfers, they don't get tax relief; nor do they count against the annual allowance.
- In specie contributions involve the transfer of assets from an individual or company to a pension scheme.
- Assets involved need to be properly valued and assessed for suitability by the receiving scheme.
'In specie' is a Latin term meaning 'in the actual form'. Transferring an asset 'in specie' means to transfer the ownership of that asset from one person/company/entity to another person/company/entity in its current form, that is without the need to convert the asset to cash.
What are in-specie transfers and contributions?
In-specie transactions can involve pension schemes in two different ways in specie transfers and in specie contributions.
In-specie transfers
In specie transfers involve the transferring of assets from one pension scheme to another. These are relatively common and usually occur between different small self-administered schemes (SSASs) and/or self-invested personal pensions (SIPPs), otherwise known collectively as investment regulated pension schemes. An investment regulated pension scheme is under no obligation to accept an in-specie transfer. The trustees of a SSAS and the scheme administrator of a SIPP will review the offered asset to ensure that:
- A proper market valuation has been made.
- It's suitable for the investment strategy of the scheme.
Let's assume a member of a pension scheme has started a new SIPP or SSAS and they want to transfer everything from their old pension arrangement to their new one. The checks have already been done and the trustee/scheme administrator of the new pension arrangement has confirmed that it will accept the transfer of assets.
Shares
The individual must first formally ask the new pension arrangement to request an in-specie transfer of assets from the old pension arrangement. This is normally done by the signing of an application form that also gives the trustees/scheme administrator of the new pension arrangement permission to approach the trustees/scheme administrator of the old pension arrangement to request the transfer. The trustees/scheme administrator of the old pension scheme must then arrange for the assets to be re-registered in the name of the new trustees/scheme administrator (or the custodian on their behalf). This process can take several months.
Property
The trustees/scheme administrator of the pension scheme will normally be the legal owner of any commercial property held within the scheme - the property 'title' is held by the trustees/scheme administrator. In a similar way to shares, the individual must make a formal transfer request (again, usually by application) that starts the process off. In the case of property, lawyers are involved and are required to change the 'title' of the property from one pension scheme trustee/scheme administrator to another. Pension schemes will want to carry out the normal conveyancing searches and checks - as they would if they were purchasing the property - to make sure it is a suitable investment for the pension scheme. This process can also take several months.
Funds
In some circumstances, funds can be transferred between schemes without first selling the units (or shares) and the process is similar to the re-registration process for shares - the legal ownership is re-registered in the name of the new pension trustee/scheme administrator. This can usually only happen when the funds are readily tradable and available through various distribution channels, for example, transfer of funds from one fund supermarket to another.
Other Assets
Other assets can be transferred such as policy-only executive pension plans (EPP), trustee investment plans, or traded endowment policies. A similar process to transferring funds would be followed.
Tax relief and costs involved
Re-registering the assets in the name of the pension scheme transfers the ownership of the assets. If a transfer involves an asset, for example, a property, the asset must be valued in cash terms by an appropriately qualified independent person before being transferred. As the assets are not being bought or sold, there are no dealing costs. However, the trustees/scheme administrator may charge for the work involved in changing the ownership of the asset and there may be two charges - on the way out of the existing scheme and on the way into the new one. This succeeds in getting the assets transferred into the new pension scheme but does not count as a contribution and therefore there is no tax relief. Neither does it count against the annual allowance.
In-specie contributions
In-specie contributions are where, specifically defined assets from outside of a pension scheme are transferred into a pension scheme instead of selling it and using the cash proceeds to fund the contribution.
There was a common misunderstanding that any assets could be used to pay contributions and tax relief would be granted. The resulting court case, HMRC vs Sippchoice Ltd, confirmed HMRC’s position that contributions must be made a monetary amount, for example, in cash, cheque, direct debit and bank transfer.
Transfers of certain shares from Save As You Earn option schemes or share incentive plans may be treated as contributions, which may have tax relief given. However very few companies are willing to accept in specie assets as pension contributions.
HMRC Pensions Tax Manual - PTM042100: Contributions: the nature of contributions: introduction
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.