Tax-free cash protection on transfer

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. 

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.

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

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.

HMRC Pensions Tax Manual PTM062240: Block transfers

Can I block transfer more than one pension plan into a scheme?

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

If a member has more than one pension plan with protected tax-free cash and they block transfer these benefits into the same scheme, the protected tax-free cash amount in the second transfer, and any subsequent transfers, will be lost when the transfer is paid to the 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

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 recorded against the scheme. When the second amount is block transferred the 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.

And if I want to block transfer out again to another scheme?

If your plan currently has protected tax-free cash due to a previous block transfer-in, and you want to transfer your benefits to another provider and keep the protected tax-free cash, the block transfer conditions must be met every time you transfer.

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.

HMRC Pensions Tax Manual PTM062240: Winding-up

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 (less than £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 (greater than £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. 

HMRC Pensions Tax Manual PTM092300: Primary protection

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 the benefits value up to 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.

Protecting pre 6 April 2006 benefits 

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 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. 

HMRC Pensions Tax Manual PTM092410: Enhanced protection

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.

HMRC Pensions Tax Manual PTM092420: Enhanced protection - transfers

Note that if tax-free cash entitlement is  greater than 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.

Further information

• Protecting pre 6 April 2006 benefits
• HMRC Pensions Tax Manual PTM063130: Scheme-specific lump sum protection - overview
• HMRC Pensions Tax Manual PTM062240: Block transfers
• HMRC Pensions Tax Manual PTM062240: Winding-up
• HMRC Pensions Tax Manual PTM092300: Primary protection
• HMRC Pensions Tax Manual PTM092410: Enhanced protection
• HMRC Pensions Tax Manual PTM092420: Enhanced protection - transfers

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.