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When a transfer may be appropriate

This article is part of
Guide to Pension Transfers

The Financial Conduct Authority defines a ‘pension transfer’ as a transfer of deferred benefits held in an occupational pension scheme to a personal pension scheme.

This is a narrow definition, Caroline Villar, product director for retail pensions at Legal & General, points out.

The FCA’s definition would not include for example a transfer between personal pension schemes which instead it terms as a ‘pension switch’.

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HM Revenue & Customs have ‘recognised transfers,’ which are regarded as authorised payments from one registered pension scheme to another and from a registered scheme to a qualifying recognised overseas pension scheme (Qrops).

Ms Villar says: “Any transfer to a scheme that does not meet these requirements is an ‘unrecognised transfer’ potentially an unauthorised payment, with tax penalties.”

According to Helen Dreyfuss, principle technical specialist of the Pensions Advisory Service, individuals can transfer pension rights to:

1) another registered pension scheme.

2) a non-UK pension scheme that is a qualifying recognised overseas pension scheme (Qrops)

3) buy a deferred annuity contract (also known as a section 32 buyout policy)

4) the Pension Protection Fund (PPF) or Financial Assistance Scheme (FAS) - transferred on the instruction of the trustees when an employer is insolvent

If a transfer is paid to anywhere other than a destination listed above, Ms Dreyfuss says the transfer payment will be unauthorised and both the individual and the scheme administrator will have to pay tax on the transfer.

She adds a member of a defined benefit scheme normally has a legal right to transfer their pension rights up until they are within one year of the scheme’s normal retirement age. Members of a defined contribution scheme are not restricted by the one year rule.

When would a client consider a transfer?

According to Ms Dreyfuss an individual might want to transfer if:

1) their pension scheme is being closed or wound up

2) they want to transfer to a better performing pension scheme if a fund switch within the same scheme is not available or would not meet their needs

3) they have pensions from more than one source and want to consider amalgamating them in to one pension scheme

4) they wish to reduce the costs associated with their pensions, particularly if they have a number of small schemes

5) they are going to live overseas and want to move their pension to a scheme in that country

6) they wish to take greater control over their pension investments through a self-invested pension option

David Trenner, technical director of Glasgow-based financial advisory firm Intelligent Pensions, says other reasons to transfer include:

7) Ill health - depending on the scheme ill-health early retirement provisions and the benefits payable on death before retirement

8) Accessing decumulation options - for example phased retirement or where the client requires tax-free cash, but no pension

9) A wish to cut links with a former employer

10) Concern about the financial strength of the scheme and/or the employer (but the scheme could go into the Pension Protection Fund, so it is essential to calculate the PPF critical yield)