Relaxation of the Block Transfer Rules
The Finance Act became law on the 17th July 2014 and formally brings in some changes to pensions that we’ve known about since the Budget, such as:
- Increases to the trivial commutation and small pots limits,
- Increase in the GAD limit, and
- Reduction in the minimum income requirement for flexible drawdown.
One change that has been included in the Act that we didn’t previously know about is a temporary relaxation in the block transfer rules. The new rules allow individuals to:
- Block transfer without a ‘buddy’, and
- Transfer into a pension scheme where they have already held a plan for more than 12 months.
This will come as welcome news to those ‘trapped’ in a plan where they have tax-free cash rights of greater than 25%, but otherwise the plan is unsuitable for them. This might be for a variety of reasons, but the most common would be high charges, restricted investment choice or unavailability of retirement options, such as drawdown.
Currently, if they want to transfer to a more suitable plan, they’ll lose their protected tax-free cash rights unless the transfer meets certain criteria – this includes the requirement that at least one other member of the scheme transfers with them at the same time and to the same scheme.
It may be difficult to find someone else in the scheme willing to transfer with them to a new scheme, or it may be impossible as there are no other members of the scheme – this would include those in s.32s, one person EPPs and assigned policies.
So, for a limited period only, those with scheme specific tax-free cash protection are able to retain that protection on transfer (including a transfer to an existing plan) without the need for a buddy, or buddies to transfer with as long as they transfer before 6th April 2015 and take their benefits before 6th October 2015. To satisfy the last condition, unless they have a protected low pension age, they’d obviously also have to be aged 55 by 5th October 2015.
The full conditions that have to be met are:
- All of the scheme benefits have to be transferred – a partial transfer doesn’t protect tax-free cash or the low pension age,
- The transfer must be made as a single transaction,
- The transfer must take place on or after 19th March 2014 and before 6th April 2015, and
- The member must become entitled to all their rights under the receiving scheme on the same date and that date must be before 6th October 2015 – this means that the member must crystallise not only all of the transferred funds, but also any other rights they may have under the receiving scheme on the same date.
Questions and answers
- Does this mean all block transfers don’t need a buddy now?
- No, it only applies to those transferring before 6th April 2015 who take their benefits before 6th October 2015. They would therefore have to be age 55 or more by 6th October 2015 at the latest.
- If the person has been a member of the receiving scheme for more than 12 months will the tax-free cash still be protected?
- Yes it will. Although the ‘normal’ block transfer rules only apply where the receiving scheme is a new scheme or where the person hasn’t been a member for more than 12 months. This rule doesn’t apply to the new type of block transfers.
- What happens if the member doesn’t take all their benefits before 6th October 2015?
- Their tax free cash will reduce to 25%.