Pension transfers

What is a pension transfer?

A pension transfer is when an individual’s pension rights move from one scheme to another. After the transfer, the receiving scheme’s rules apply, and it becomes responsible for paying the individual’s benefits. Common reasons for transferring include a scheme winding up, changing employer arrangements, accessing different benefit options (such as drawdown), consolidating a number of pensions together, or transferring a pension credit following divorce.

Transfer vs switch vs conversion

“Transfer,” “switch” and “conversion” are often used interchangeably, but they mean different things:

• Pension transfer: Moving accrued rights from one scheme to another, including safeguarded benefits to flexible benefits in a different scheme.
• Pension switch: Moving between schemes of the same broad type where it doesn’t meet the definition of a transfer.
• Pension conversion: Safeguarded benefits converted into flexible benefits within the same scheme.

Regulatory advice requirements and HMRC conditions differ, so it’s important to use the correct term.

Where can benefits be transferred to?

A transfer out of a UK registered pension scheme will only be authorised if it is:

• A recognised transfer to another UK registered pension scheme or a qualifying recognised overseas pension scheme, or
• A transfer to specific destinations such as the Pension Protection Fund (PPF) or the Financial Assistance Scheme (FAS).

Recognised transfers

A transfer is a recognised transfer if:

• funds become held for the purposes of providing benefits for the transferring individual under the receiving scheme, and
• transferred to another registered pension scheme or a qualifying recognised overseas pension scheme.

Recognised transfers are authorised payments. Transfers that are not recognised (and not otherwise permitted) are unauthorised payments and can create tax charges.

Statutory right to transfer

Some members have a legal right to transfer accrued pension benefits under the Pension Schemes Act 1993. In broad terms, that right applies to the specific benefits being transferred and usually only if those benefits have not already been put into payment or designated for drawdown.

For transfer requests made on or after 30 November 2021, the statutory right is also subject to The Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021.

In practice, the transfer can only proceed as a statutory transfer if one of two conditions is met:

First condition

The first condition applies where the transferring scheme is satisfied beyond reasonable doubt that the receiving is either:

• A public service pension scheme (for example, NHS Pension Scheme, Teachers' Pension Scheme, Civil Service Pension Scheme)
• An authorised master trust
• An authorised Collective Defined Contribution (CDC) scheme

If this condition is satisfied, the transfer typically moves forward without the additional checks mandated by the second condition.

Second condition

If the first condition is not met, the transfer can only go ahead if the trustees or scheme managers are confident that the second condition has been satisfied.

This requires extra due diligence, such as verifying employment connections for certain occupational pension scheme transfers, confirming overseas residency for some QROPS transfers, and checking for any red or amber flags that might indicate a potential scam.

If a red flag is present, the statutory transfer must not proceed. If an amber flag is present, the member must first take mandatory guidance from MoneyHelper before the transfer can continue.

The Pension Regulator guidance, dealing with transfer requests, gives full details of the red and amber flags.

Safeguarded benefits and advice requirements

For more detail, see our article on safeguarded benefits

Broadly, where safeguarded benefits worth more than £30,000 are being transferred or given up for flexible benefits, appropriate independent financial advice will normally be required before the transfer or conversion can proceed.

Transferring GMP

GMP can be transferred to certain permitted destinations, including another occupational pension scheme, a personal pension scheme, or an overseas arrangement, provided the relevant legal conditions are met.

Where GMP rights are transferred to a personal pension, the member gives up the GMP itself and the receiving scheme instead provides ordinary rights based on the transfer payment. For that transfer to be valid, the payment must meet the statutory minimum requirements for the GMP rights being given up which includes a condition that the ‘relevant part of the transfer payment must be at least equal to the cash equivalent of the GMP’.

For more information visit: Transfer your scheme member’s contracted-out pension rights

Clients living abroad: UK-to-UK and overseas transfers

Someone living overseas may still be able to transfer a UK pension, but the rules and practical issues will depend on whether the transfer is to another UK registered pension scheme or to an overseas pension scheme.

HMRC rules allow an individual living overseas to transfer benefits from one UK registered pension scheme to another UK registered pension scheme. However, in practice, some providers may only accept the transfer if the individual is habitually resident in the UK.

Where the transfer is to an overseas scheme, it must be to a QROPS to avoid unauthorised payment issues, and an overseas transfer charge may apply depending on the member’s residence and the location of the receiving scheme.

For a fuller explanation of overseas pension transfers, including QROPS, the overseas transfer charge and the overseas transfer allowance, see our article on overseas pension transfers.

Partial transfers

A partial transfer involves moving only part of an individual’s pension rights to another scheme, while the rest stays where it is. Whether this can be done depends on the type of benefits being transferred, whether the benefits have already been crystallised, and whether the scheme rules and provider will allow it.

Partial transfers of uncrystallised benefits

A partial transfer of uncrystallised pension rights will normally be possible from a tax perspective, provided the transfer is a recognised transfer and the transferring scheme’s rules permit it. In practice, many defined contribution arrangements allow a member to transfer part of their uncrystallised pot and leave the balance behind, but this is still subject to the provider’s own administration rules and any transfer conditions that apply.

Partial transfers of crystallised benefits

Once benefits have been crystallised, the position is more restrictive. If the transfer relates to a drawdown fund, HMRC requires all sums and assets in that drawdown arrangement to be transferred for it to be a recognised transfer. A transfer of only part of a drawdown arrangement is not a recognised transfer and would create unauthorised payment issues. The receiving scheme must also set up a new arrangement for the transferred drawdown arrangement, and if the fund continues in drawdown, it must generally be on a like-for-like basis.