PTM107000 - Transfers: Transfer of scheme pensions and dependants’ scheme pensions
Glossary PTM000001
Section 169(1A) to (1C), paragraphs 2(6A) and 16(2A) to (2C) schedule 28 Finance Act 2004
Regulations 3 to 5 and 8 to 9 The Registered Pension Schemes (Transfer of Sums and Assets) Regulations 2006 - SI 2006/499
A scheme pension (or dependants’ scheme pension) may be payable direct from a registered pension scheme or by an insurance company on behalf of the registered pension scheme. Such a scheme pension can be transferred to another pension scheme or another insurance company. Alternatively, a registered pension scheme may transfer funds to an insurance company to provide a scheme pension (or dependants’ scheme pension) outside of the pension scheme, for example to secure a member’s benefit when a scheme is winding-up.
Transfer must be on a like for like basis
Tax treatment of scheme pension after the transfer
Tax treatment of dependants’ scheme pension after transfer
Transfer must be on a like for like basis
The transfer of sums and assets representing a scheme pension must be used to provide a scheme pension following the transfer. If this does not happen the transfer is not a recognised transfer. The pension scheme will have made an unauthorised payment.
A transfer of sums and assets representing a dependants’ scheme pension must be used to provide a dependants’ scheme pension following the transfer. Where a new dependants’ scheme pension is not provided:
- if the transfer is from a scheme the transfer is not a recognised transfer and so the transfer is an unauthorised payment
- if the transfer is from one insurance company to another the pension scheme that provided the sums and assets to purchase the dependants’ scheme pension is treated as having made an unauthorised payment.
The transfer must relate to all the member’s or dependant’s scheme pension. A transfer from a scheme that represents only part of the entitlement to the scheme pension will not be a recognised transfer.
Tax treatment of scheme pension after the transfer
If the transfer is made on like for like basis as described above then for certain purposes the new scheme pension is treated as if it were the original scheme pension.
Collective Money Purchase Schemes (CMP) Regulation 3 of The Registered Pension Schemes (Transfer of Sums and Assets) Regulations 2006 (SI 2006/499).
There is an exception to the condition that a transfer must be on a like for like basis where a CMP is in the process of winding up and a member transfers to a non collective money purchase scheme.
Sums and assets under a CMP scheme in winding up where transferred to another registered pension scheme will be a recognised transfer:
- if before the transfer they were held for the purposes of paying CMP periodic income and,
- after the transfer they are applied towards the provision of a drawdown pension.
The transfer will not be a recognised transfer if the sums and assets are not applied for the provision of a drawdown pension after the transfer occurred.
No BCE 2 and pension commencement lump sum
The member becoming entitled to a scheme pension provided by the new scheme or insurance company will not be a BCE 2. The member also can’t become entitled to a pension commencement lump sum because of the transfer. For both purposes the new scheme pension is treated as the original scheme pension.
Normal minimum pension age
If the transfer took place on or after 6 April 2010 the member is treated as having reached normal minimum pension age by reference to the day on which the original scheme pension was first paid. This, for example, allows a member who became entitled to benefits before 6 April 2010 aged 50 to 54 (when the normal minimum pension age was 50) to transfer their scheme pension to a new scheme whilst they are still under the current normal minimum pension age.
Pension increases and BCE 3
For the purpose of measuring a pension increase to see if a BCE 3 arises the permitted margin (see PTM088630) will be measured from the start of the original scheme pension.
Entitlement to scheme pension arose before 6 April 2006
If the member’s first benefit crystallisation event (BCE) after 5 April 2006 occurs after the transfer of the scheme pension, the scheme pension continues to count as a ‘pre-commencement pension’ that reduces the member’s available lifetime allowance in accordance with paragraph 20 Schedule 36 Finance Act 2004. (PTM088300 provides more information as to the impact of pensions in payment before 6 April 2006 on the member’s lifetime allowance.)
Reductions in scheme pension
A scheme pension should only reduce in circumstances prescribed by regulations. If the annual rate of scheme pension reduces in other circumstances then the pension is no longer a scheme pension (see PTM062340). Any reduction in scheme pension that took place before the transfer-in, in accordance with the prescribed conditions may continue to apply after the transfer if both the following conditions are met:
- the rate of the scheme pension payable under the new scheme is not less than the rate of scheme pension paid under the transferring scheme at the point of transfer; in making this test reasonable administrative cost for making the transfer may be deducted
- any guaranteed period for paying the scheme pension (see PTM062320) cannot be extended; any period of guaranteed pension payment must end on or before the expiry date of the guarantee period (if any) under the original scheme pension.
In certain circumstances a ‘substantial reduction’ in scheme pension can result in any tax-free lump sum paid in connection with the scheme pension, for example a pension commencement lump sum, being an unauthorised payment (see PTM063200). The ‘substantial reduction’ test that applied to the old scheme pension will continue to apply to the new scheme pension.
Pension protection or annuity protection lump sum death benefit
For the purposes of calculating the maximum pension protection lump sum (see PTM073300) or annuity protection lump sum death benefit (see PTM073400) the scheme pension paid by the new scheme or insurance company is treated as if it was the original scheme pension. The maximum lump sum will be calculated by reference to the amount crystallised by the original scheme pension and the amount of scheme pension payments made under both the original and new scheme pensions.
Tax treatment of dependants’ scheme pension after transfer
Where the transfer is made on a like for like basis as described above there are no other special provisions relating to the tax treatment of the dependants’ scheme pension following the transfer.