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Tax-free cash protection on transfer

Published  21 October 2022
   5 min read

Some members of occupational pension schemes, section 32 buy-out policies or deferred annuity contracts have an entitlement to more than 25% of their pre 6 April 2006 benefits value as tax-free cash. This can be lost on transfer.

Here we look at the types of transfer that allow this higher tax-free cash entitlement to be kept.

Key facts

Tax-free cash protection is lost on transfer unless it's one of the following:

  • it's a block (or buddy) transfer
  • it's a wind-up transfer
  • the individual has registered for primary or enhanced protection.

What is scheme specific tax-free cash protection?

If an individual's tax-free cash entitlement at 5 April 2006 under a registered pension scheme is more than 25% of the benefits value, it can be protected through scheme specific tax-free cash protection.

Protection means that the tax-free cash amount can be increased. Although the lifetime allowance has reduced since its highest level of £1.8 million in 2010/11 and 2011/12, the tax-free cash sum is still increased by 20% (£1.8 million/£1.5 million). If in the future the lifetime allowance increases to more than £1.8 million the tax-free cash will be indexed in line with the increases to the lifetime allowance. Post 6 April 2006 fund growth can also give rise to additional tax-free cash. 

HMRC Pensions Tax Manual PTM063130: Scheme-specific lump sum protection - overview

Scheme specific tax-free cash protection is lost on transfer unless it's a block (or buddy) transfer or a transfer on wind-up of a scheme.

What is a block (or buddy) transfer?

A block (or buddy) transfer has a number of conditions:

  • More than one member of the scheme must transfer at the same time to the same scheme. A transfer to or from a section 32 plan can’t meet this condition as you can't have more than one member of a section 32 plan. A group personal pension, personal pension, stakeholder pension or an occupational pension scheme under the same trust will be able to have more than one member in it and so a block transfer may be possible.
  • 'Same time' doesn't mean funds have to transfer on the same day, as long as the transfers are obviously meant to be part of the same transaction.
  • All of the individual’s benefits under the scheme have to be transferred - a partial transfer doesn't protect tax-free cash.
  • The individual must not have been a member of the receiving scheme for longer than 12 months unless that scheme is a personal pension (including a stakeholder pension) that has only contracted out rights and they were a member on 5 April 2006.

If these conditions are met any pre 6 April 2006 entitlement to tax-free cash of more than 25% will be maintained under the new plan.

HMRC Pensions Tax Manual PTM062240: Block transfers

Can an individual transfer more than one block transfer into a scheme?

Only one protected tax-free cash amount can be held in a scheme.

If an individual has more than one pension scheme with protected tax-free cash and they block transfer these benefits into the same receiving scheme, the protected tax-free cash amount in the second transfer, and any subsequent transfers, will be lost. 

Example

First transfer from an EPP - transfer value - £500,000, tax-free cash - £350,000 (70%)

Second transfer from a CIMP - transfer value - £100,000, tax-free cash - £80,000 (80%)

Total transfer value - £600,000

When the first amount is block transferred to the new scheme the protected tax-free cash amount of £350,000 is recorded against the scheme. When the second amount is block transferred the second protected tax-free cash amount is lost as only one amount can be held in a scheme, leaving only the original £350,000 protected, a drop of £80,000.

Can another block transfer out be done again?

If the individual’s benefits under a scheme currently has protected tax-free cash due to a previous block transfer-in, and they want to transfer their benefits to another scheme and keep the protected tax-free cash, the block transfer conditions must be met every time they transfer.

What is a wind-up transfer?

This is a specific type of transfer. For a transfer to be treated as a winding-up transfer a number of conditions must apply:

  • the individual has protected tax-free cash, and
  • the existing scheme must be winding up, and
  • the receiving scheme must be a deferred annuity contract, usually a Section 32 plan.

If all of the above conditions are met then any protected tax-free cash will be maintained under the new pension scheme.

HMRC Pensions Tax Manual PTM062240: Winding-up

What about tax-free cash for those with primary protection?

Individuals who had a benefits value at 5 April 2006 of over £1.5 million could have applied for primary protection to reduce or eliminate the chance that a lifetime allowance charge will apply. Members had until 5 April 2009 to register for primary protection.

For those who have primary protection, if on the 5 April 2006 their entitlement to tax-free cash was less than 25% of the lifetime allowance (£375,000), the amount of tax-free cash available is 25% of the benefits value up to 25% of £1.5 million (£375,000). Any scheme specific tax-free cash that the individual has will apply subject to the normal rules.

If on the 5 April 2006 their entitlement to tax-free cash was more than 25% of the lifetime allowance (£375,000) this entitlement is retained as a monetary amount and appears on their primary protection certificate. The amount payable when benefits are taken is the amount available at 5 April 2006 increased by 20% until the lifetime allowance is more than £1.8 million when it will be indexed in line with increases to the lifetime allowance. 

HMRC Pensions Tax Manual PTM092300: Primary protection

Primary protection and transfers

Transferring pension benefits when an individual has primary protection will not affect their tax-free cash amount. The only exception to this is where someone doesn’t have registered tax-free cash on their primary protection certificate but has scheme specific tax-free cash protection as the normal block transfer and wind-up transfer rules described above will need to apply in order to protect it.

Protecting pre 6 April 2006 benefits 

What about tax free cash for those with enhanced protection?

Enhanced protection provides full protection from the lifetime allowance charge when individuals come to take their benefits. There was no minimum benefits value at 5 April 2006 to register for enhanced protection. Individuals had until 5 April 2009 to register for enhanced protection.

Somebody applying for enhanced protection could also apply for primary protection, as backup, if their benefits value exceeded £1.5 million on 5 April 2006.

If an individual with enhanced protection didn’t have a tax-free cash entitlement to more than 25% of the lifetime allowance on 5 April 2006 (£375,000) and doesn’t have scheme specific tax-free cash, their tax-free cash when they come to take benefits is the lower of:

  • 25% of £1.5 million*, and
  • 25% of their fund value

*It will revert to the standard lifetime allowance if it goes above £1.5 million.

If an individual with enhanced protection has an entitlement to scheme specific tax-free cash but less than £375,000 (25% of the lifetime allowance on 5 April 2006) overall, they are able to keep their scheme specific tax-free cash. 

If the individual with enhanced protection had an entitlement to tax-free cash of more than 25% of the lifetime allowance as at 5 April 2006 (£375,000) they retained this entitlement so that when they come to take their benefits their tax-free cash will be based on the same percentage of the benefits value as it was on 5 April 2006. This will be registered on their enhanced protection certificate.

HMRC Pensions Tax Manual PTM092410: Enhanced protection

Enhanced protection and transfers

Transferring pension benefits when an individual has enhanced protection will not affect their tax-free cash amount. The only exception to this is where someone doesn’t have registered tax-free cash percentage on their enhanced protection certificate but has scheme specific tax-free cash protection as the normal block transfer and wind-up transfer rules described above will need to apply to protect it.

When doing a transfer with enhanced protection you need to be careful that it is a permitted transfer.

HMRC Pensions Tax Manual PTM092420: Enhanced protection - transfers

One final point to bear in mind.

As well as all the conditions explained above, the receiving scheme/insurer must be willing and able to accept the transfer.

Note

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.