RPSM03105522 - Technical Pages: Protecting pension rights from tax charges: Lump sums: Scheme specific protection: Block transfer issues

Problems with making a block transfer to a scheme that already has protection of lump sums exceeding 25% for an individual

Protection of lump sum rights exceeding 25% is not fully effective where a transfer results in a scheme containing two or more tranches of lump sums exceeding 25% for an individual.

Lump sum protection under Finance Act 2004 was originally written on the basis that a block transfer could not be made where the individual was already a member of the scheme receiving the transfer.

Where there is a block transfer continuing protection is given by treating the scheme receiving the block transfer as if it were the scheme making the transfer for the purposes of establishing the maximum pension commencement lump sum the individual can receive. This protection clearly works where the receiving scheme has only received one block transfer for the individual and it was not previously a protected pension scheme for that individual.

Changes made by FA 2005 and the Registered Pension Schemes (Block Transfers) (Permitted Membership Period) Regulations 2006 – SI 2006/498 – mean that a block transfer can be made where an individual has been a member of the receiving scheme for no more than 12 months before the date of the transfer. This means that

• a scheme can receive more than one block transfer in respect of an individual, or
• a block transfer can be made to a scheme under which an individual already has protection for lump sums exceeding 25%.

There are problems with how protection operates where a transfer results in an individual having more than one tranche of lump sum rights exceeding 25% in a single pension scheme.

As protection on block transfers work by treating the receiving scheme as if it were the transferring scheme protection can only be given to one (not all) tranche(s) of protected lump sums for an individual. The legislation is drafted to give protection both to an ‘original’ protected pension scheme and a scheme receiving a block transfer. The interaction of the legislation is such that it is the value of the lump sum held on 5 April 2006 (the ‘condition A’ lump sum’) that is protected. Protection for the lump sum rights being transferred is lost even though the transfer is a block transfer.

The difficulties of this situation can be avoided by not making block transfers to schemes that are already protected or have already received a block transfer of lump sum rights exceeding 25% for the individual.