Tax-free cash protection on transfer

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 (A-Day) benefits value as tax-free cash. This can be lost on transfer.
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 member has registered for primary or enhanced protection.

Tax-free cash protection on transfer - some common questions contains answers to the most common questions we receive on this subject.

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

Scheme specific tax-free cash protection

If the member's tax-free cash entitlement at 5 April 2006 is less than £375,000 but 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 2010/12, the tax-free cash sum is still increased by 20% (1.8m/1.5m). 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. See Protecting pre 6 April 2006 benefits.

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.

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 doesn'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 usually meet this condition.
  • '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 scheme benefits have to be transferred - a partial transfer doesn't protect tax-free cash.
  • The member 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.

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.

More than one block transfer at the same time

If a member has more than one pension plan with protected tax-free cash and they block transfer these benefits into the same pension scheme, they will not keep their right to the total tax-free cash amount.

Only one protected tax-free cash amount can be held in a scheme. Care needs to be taken where members have more than one protected tax-free cash amount, as a transfer to one scheme could significantly reduce their entitlement.

Example

(For simplicity, this example does not take into account any increase in benefits)

Transfer from an EPP - transfer value - £500,000, tax-free cash - £350,000 (70%) Transfer from a CIMP - transfer value - £100,000, tax-free cash - £80,000 (80%)

Total value - £600,000

Protected tax-free cash amount (assuming the higher protected amount) is £350,000, a drop of £80,000.

Subsequent block transfers

Where the block transfer conditions are met, further block transfers can be made without affecting the member's tax-free cash entitlement.

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 member 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 plan.

Primary protection

Scheme members 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.

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).  

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. 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. 

Primary protection and transfers

If the member was entitled to less than 25% of £1.5 million as tax-free cash on 5 April 2006 and they transfer to another registered pension plan, the amount payable when benefits are taken will be 25% of £1.5 million (not the personal lifetime allowance).

If the member is entitled to tax-free cash of more than 25% of the lifetime allowance, the entitlement will remain after transfer. The tax-free cash payable when benefits are taken will be the amount available on 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.

See Protecting pre 6 April 2006 benefits for further information.

Enhanced protection

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

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

If the member selected enhanced protection, in order to keep this they must either:

  • have stopped paying into any money purchase scheme (excluding any on-going contracted-out payments to an existing scheme) from 6 April 2006, and/or
  • build up limited benefits in the pension scheme on or after 6 April 2006 if members of defined benefit schemes or cash balance arrangements.

If the member has an entitlement to more than 25% of their benefits value as tax-free cash, but less than 25% of the lifetime allowance on 5 April 2006 they can keep this. Their pre 6 April 2006 tax-free cash will be 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.

If the member has an entitlement to tax-free cash of more than 25% of the lifetime allowance they retain 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. 

Enhanced protection and transfers

If the member was entitled to less than £375,000 (25% of the 2006 lifetime allowance) but more than 25% of the benefits value as tax-free cash this higher level of tax-free cash would not be protected on transfer by enhanced protection.  However, it would be protected under the scheme specific tax-free cash protection rules and this higher amount could be kept on transfer but only if it was part of a block transfer or a wind-up transfer.

If the member is entitled to tax-free cash of more than 25% of the lifetime allowance, the entitlement remains after transfer. The tax-free cash will be the same percentage of the benefits value as it was on 5 April 2006.

Note that if tax-free cash entitlement is >25% of the lifetime allowance AND enhanced or primary protection apply:

  • the entitlement remains regardless of how many transfers are made, and
  • the block/winding up transfer rules need not be met in order to retain the tax-free cash after transfer.

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.

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Last updated: 19 Mar 2019

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.