Pension transfer opportunity

The new pension freedoms are almost here, but some individuals may be locked in to outdated contracts for fear of missing out on pre A­-Day tax free cash entitlements. And that means their retirement income options may be limited.

Help may be at hand for some individuals which will allow them to transfer to a fully flexible contract that offers the full range of new income options, without sacrificing any tax free cash in excess of 25%. But they’ll have to get the wheels in motion now in order get the transfer completed before the April   deadline.

Buddy­less transfers

Until now, a pension transfer normally meant giving up the higher lump sum entitlement ­ unless it was part of a ‘block transfer’ with a ‘buddy’ (or benefits were being bought ­out on an occupational pension scheme wind­up). These rules have been temporarily relaxed until April.  Individuals looking to take their benefits soon can now transfer to a new provider on their own without losing their lump sum protection, so long as:

  1. they transfer all their rights from the old pension in one go;
  2. the transfer happens before 6 April 2015; and
  3. all tax free cash under the new pension is taken before 6 October

This creates a short window of opportunity for ‘at retirement’ people with protected lump sums to move out of inflexible legacy pensions, such as buy­out contracts or executive pension plans, into more modern contracts better placed to support April’s income flexibility when it comes ­ without needing a buddy.

But it’s only suitable if they want to take their lump sum before next October. Missing this deadline means the lump sum protection is lost, which could be a costly mistake. In practice, the safest approach is possibly to fully crystallise benefits immediately after the transfer to remove this risk. This needn’t mean drawing an income. Taking the enhanced lump sum and designating the remaining funds for drawdown will meet the requirements.

Look before you leap

Individuals need to check there are no disadvantages to making the transfer that outweigh the benefits. For example, it could trigger an MVA on with­profits  investments.

Some people may not actually have a problem. Some providers, including Standard Life, changed legacy contracts at A-­Day to allow ‘unsecured’ (drawdown to drawdown) transfers. This allows the protected tax free lump sum to be taken from the old plan before transferring the balance to access flexibility.  Individuals with this option don’t have to transfer before April or take benefits by October. They can take their lump sum, then move to a flexible income vehicle, whenever it suits them.