A transfer may contain both an uncrystallised element and drawdown funds – in which case it is possible to transfer just the uncrystallised element, just the drawdown funds, or the drawdown funds and part of the uncrystallised funds. As long as the drawdown funds stay together there is freedom to split the uncrystallised element if required.
Like-for-like
When crystallised pension funds are transferred from one scheme to another, they can only be transferred on a “like-for-like” basis.
When it comes to drawdown transfers this means the transfer will either be a capped drawdown to capped drawdown transfer or a flexi-access drawdown to flexi-access drawdown transfer.
Of course, it is possible to make a capped drawdown transfer and upon receipt in the new scheme immediately convert it to flexi-access drawdown, and many providers will facilitate this as a streamlined process.
Ring-fencing
In addition to drawdown funds having to stay together on transfer, they also have to be ring-fenced within the receiving scheme.
This means that, once transferred into the new scheme, they cannot simply be added to any existing drawdown funds already held in that scheme.
They must be separately designated to form their own “pot” or drawdown arrangement under the new scheme.
Some schemes may keep the actual physical assets/investments separate, but in most cases the split between separate drawdown funds or funds that have not yet been crystallised will be purely notional.
If a consolidation exercise is being carried out, with several drawdown pots being brought together under one scheme, then you would end up with multiple arrangements.
It is understandable why capped drawdown arrangements are kept separate.
Each arrangement will have its own pension year and maximum income which needs to be reviewed every three years (or annually after age 75).
When it comes to flexi-access drawdown the need for separate arrangements is a lot less clear and is a largely a legacy issue as the relevant rules have not been updated to take into account pension freedoms.
If uncrystallised funds are also transferred they can be added into an uncrystallised arrangement along with any other uncrystallised funds, whatever the source.
This means in most circumstances you will only ever have one uncrystallised arrangement, whereas you can have many drawdown arrangements.
When the time comes to crystallise additional funds, HMRC rules allow these to be added to any existing crystallised arrangement regardless of whether those funds were originally crystallised under the existing scheme or first crystallised elsewhere and then transferred in.
The only exception to this rule is for drawdown funds that started before A-day - the widescale changes to pensions which came into force on 6 April 2006. These funds can never be added to after A-day.
