The start of the new tax year also marks the 15th anniversary of pensions A-Day.
One concept introduced by pensions simplification was the block transfer.
Originally a block transfer was supposed to prevent members from being penalised when they had no choice in transferring (usually as part of a bulk exercise).
Eventually the difficulties in fairly defining exactly what ‘bulk’ meant led to some requirements being watered down prior to introduction such that individuals could use the block transfer mechanism to retain protection when transferring for more conventional planning reasons.
This is how it’s been commonly used since A-Day and, in a post pension freedom world, there is an argument the concept could be done away with completely.
What is a block transfer?
Put simply, a block transfer is a special type of transfer that when applied for and executed correctly ensures that any entitlement to a protected tax-free cash and/or early retirement age isn’t lost on transfer.
A client could have built an entitlement to tax-free cash of more than the new ‘standard’ 25% that was going to be introduced. Others might have had a right to retire before the normal minimum retirement age, 50 at A-day and 55 since 6 April 2010.
For example, a professional footballer who was a member of the PFA pension scheme on or before 5 April 2006 would be entitled to an early retirement age of 35.
How do you do one?
For a transfer to be a block transfer it must satisfy four main conditions.
The transfer must be made for more two or more members of the same scheme
The members do not have to both have a protected entitlement, there just needs to be more than one as part of the single block transfer exercise. Transfers from section 32 buy outs cannot normally meet this requirement as they are individual contracts.
The transfer must be made as a single transaction
This does not mean that every asset and cash element must transfer on the same day. The transfers just need to be undertaken as one exercise and from the same transferring scheme to the same receiving scheme.
The transfer must represent all the pension rights held for the transferring members.
No partial transfers are allowed.
The member (with the protected entitlement) must not have already been a member of the receiving pension scheme for more than 12 months prior to the transfer.
This last point is often overlooked.
The block transfer has completed – is there anything else to consider?
Yes. When the time comes to take benefits, then to use the protected tax-free cash and/or protected pension age, everything held in the scheme must be crystallised. Any partial or phased crystallisations would lead to a loss of the protection and could be treated as unauthorised payments.
In the case of protected pension age, this can present an opportunity but also requires extra care. After the block transfer, the new scheme holds the protection. Prior to taking benefits, the client could transfer any other schemes they hold elsewhere to the new scheme. They could make further contribution, and all of those pension rights would benefit from the lower pension age.
This could be beneficial depending on your client objectives but remember – to make use of the protected pension age, all funds in that scheme must be crystallised at the same time.
Part of your advice will therefore need to consider whether accessing more funds now is the priority. If not, any non-protected schemes could stay where they are but that would mean waiting until age 55 (the current minimum retirement age) before accessing them.
Once the protected retirement age has been used, a client is free to transfer the crystallised funds to a new arrangement. This onward transfer does not need to be a block transfer.
Lifetime allowance issues
Advisers also need to consider the impact on a client’s lifetime allowance (LTA) when using a protected retirement age. If the protected age itself is less than 50, then the client’s LTA is reduced by 2.5% for every complete year before they are due to reach the current normal minimum retirement age (currently 55).
Consider an ex professional footballer client who has just recently turned 35 – his reduced LTA if he fully crystallised today would be –
Standard LTA = £1,073,100
Reduction – 19 x 2.5% = 47.5% (19 complete years until 55th birthday)
Reduced LTA = £1,073,100 x 52.5% = £563,377.50
These rules are a lot more complicated than they should be. Furthermore, requiring a transfer buddy and imposing such a penalty reduction in the lifetime allowance also appears at conflict with the principles underpinning freedom and choice in pensions.
Nearly 15 years since we were introduced to block transfers, it feels like time to remove the need to jump through all these hoops. Until then, clients and advisers will have to be on guard given how valuable these protections can be.
Charlene Young is senior technical consultant at AJ Bell