Where a scheme member wishes to change from an existing pension scheme to a new pension scheme, a pension transfer of member rights will facilitate this move. From the early-mid 1990's pension transfers got a bad reputation as many people were advised to transfer their pension rights from final salary occupational pension schemes to money purchase pensions and buyout policies, commonly known as section 32 policies, with no analysis about whether this was in their best interests or not.
Poor advice was given because individuals did not understand the ultimate consequences of a pension transfer, or the advice given was incorrect and the individual suffered financial loss. To give advice on pension transfers from occupational pension schemes, Independent Financial Advisers must be authorised by the Financial Services Authority and demonstrate a high level of competence in this area.
The amount of cash accumulated in a pension that can be transferred from a previous employment to a new pension is called a transfer value. The value is calculated by an actuary in the case of an Final Salary pension scheme or reflected in the actual value of the funds (or underlying investments) in the pension fund in the case of personal pensions / stakeholder pensions, or money purchase schemes. It will normally be transferred to a new scheme, a personal pension transfer plan, or a section 32 policy. (A section 32 is money purchase plan that only accepts transfer payments from occupational pension schemes and retains the rules of the occupational scheme, but the ownership and investment control lies with the policyholder. These plans were useful when the tax-free lump sum or death benefits was higher under the occupational scheme than would be allowable under a personal pension plan).
From 06/04/2006, fewer Section 32 contracts have been issued, because the effect of the new pension legislation is to create a similar set of rules applicable to all pension schemes. There is no longer any need for 'special' plans to preserve benefits when switching between different pension regimes, as there will now be only one pension regime. However, one exception is where two or more individuals seeking protection of their pre-2006 tax-free lump sums from an Occupational Pension Scheme (such as an Executive Pension Plan) that would have been greater than under the current rules may decide to wind up the arrangement and transfer their funds to a Section 32 arrangement. However, such transfers are of a specialist nature, and must be considered carefully.
Previously, when transferring retirement benefits from an occupational pension scheme to a personal pension or similar plan, the Inland Revenue applied a test known as the Appendix XI test (previously known as the GN11 test) to prevent the scheme member transferring the fund value that would produce benefits at retirement age that are greater than the maximum Inland Revenue benefits allowable under the occupational pension scheme.
However, as all schemes are now subject to the same rules, it will be more straightforward to transfer between different types of pension arrangements (however, the same precautions should be applied if benefits are being transferred out of Final Salary pension schemes into Money Purchase arrangements). The main restriction on pension benefits is now the 'lifetime allowance'. See the document on Pension Simplification
for more details.
At retirement it is possible for individuals of occupational or personal pension schemes to exercise an open market option to find the highest pension income. This income can be paid as a level annuity or can have added features such as a guaranteed period, varying levels of survivors pension or with RPI or fixed rate escalation. Alternatively, the member may wish to increase flexibility by taking benefits via unsecured income
where the pension fund is greater than, say, £100,000, and the member is not dependent wholly on this money to provide an income in retirement.
Currently, there are still many reasons for transferring between different types of schemes and contracts. The reasons could be:
- The old scheme has high charges, and the fund is being transferred to a contract with lower / more competitive charges.
- A current contract scheme / policy has a restrictive range of investments, or the investments have performed poorly with no upturn in sight, so you wish to move the funds elsewhere where the range of investments is wider and the investments are likely to perform better.
- You have a collection of small pensions, and wish to consolidate them, possibly for easier administration and reporting, and possibly because you may choose to self-invest the pension funds.
When a transfer is being considered, suitable independent financial advice should always be sought, as there are numerous factors that need to be taken into consideration (such as age, number of years to retirement, fund value, attitude to investment risk, benefits of the existing arrangement and any penalties that the existing arrangement would impose if a transfer were to take place). A difference in just one of these factors could make a big difference between whether a transfer would be beneficial or not.
NOTE: This document is intended to provide a brief overview of the subject. It should not be read as a recommendation to use any particular product, as it does not take into account individual circumstances and attitudes.
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