Tax-free cash protection on transfer

What is scheme specific tax-free cash protection?

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

This protected higher pre-6 April 2006 tax-free cash amount is automatically increased by 20%. The growth on the post 6 April 2006 fund may 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 a lifetime allowance charge could have applied. Individuals had until 5 April 2009 to register for primary protection. The lifetime allowance was abolished from 6 April 2024 and the lump sum allowance and lump sum and death benefit allowance now applies.

If pre-6 April 2006 tax-free cash was less than £375,000 (25% of the lifetime allowance on 6 April 2006) the amount payable is the lesser of:

• 25% of the benefit value, and
  25% of £1.5 million.

The tax-free cash is protected as a monetary amount if it exceeded 25% of the lifetime allowance on 5 April 2006. Since 6 April 2012 the amount payable is the tax-free cash available on 5 April 2006 increased by 20%.

Their maximum tax-free cash entitlement would have been shown as a monetary amount on their primary protection certificate.

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?

When it was introduced in 2006 enhanced protection provided full protection from the lifetime allowance charge when individuals took 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.

Until 6 April 2023 there were several events on which individuals could lose their enhanced protection, including if they contributed to any arrangements under a registered pension scheme.

As part of the changes introduced for the abolition of the lifetime allowance, the enhanced protection cessation events were removed from 5 April 2023. As a result, the government introduced a cap on the maximum amount of a tax-free cash these individuals can receive, set at the maximum amount they could have received as at 5 April 2023.

An individual with an entitlement to tax-free cash of more than £375,000 and more than 25% of the fund on 6 April 2006 could retain their tax-free cash entitlement. Their maximum tax-free cash entitlement would have been shown as a percentage on their enhanced protection certificate.

Since 6 April 2023 their tax-free cash is still based on this percentage. However, the percentage is applied to their total benefits value on 5 April 2023.

An individual with an entitlement to tax-free cash of more than 25% of their benefits value on 6 April 2006 but less than £375,000 couldn't protect the tax-free cash amount using enhanced protection. However, scheme specific tax-free cash protection may apply.

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 - PTM176310 - Lump sum and lump sum and death benefit allowance: Enhanced protection

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.