What is a Pension Transfer Value
Updated: May 17, 2022
An employee who has at least three months service has the option of taking a pension transfer value to another pension scheme. The transfers mainly go to stakeholder pensions because other types of pension may not accept the potentially small payments involved.
Pension Transfer Value
Preserved benefits can also be offered, but most trustees and employers prefer instead to avoid the extra administration involved in handling what are likely to be small amounts of money. If the employee is offered a preserved fund they may, at anytime, choose to transfer this to an individual pension arrangement or to the occupational pension scheme of the employer.
To do this, the member usually needs to provide a discharge to the trustees of the old occupational scheme.
This formerly gives up the right to the old benefit in exchange for the transfer value
This is in addition to any statutory discharges, and new line the trustees must be satisfied that the arrangement to which they are making the transfer is an HMRC registered scheme.
Transfers to non registered schemes would bring the unauthorised payments rules into play.
The amount of the transfer is the value of the preserved benefit less any disinvestment charge.
In an insured scheme, the transfer value is effectively a surrender value. The amount may differ, depending on whether it is an individual transaction or one element from a full or partial scheme discontinuance or winding up.
Surrender charges may be avoided if the policy itself can be assigned to the member or the members new scheme.
Transferring Flexible Benefits
In certain circumstances, particularly where large sums are involved the member may want to transfer their fund, either occupational or individual, to take advantage of more flexible income options such as drawdowns or UFPLS.
Benefit categories within a scheme are defined as either flexible or safeguarded. Flexible benefits are money purchase benefits, cash balance benefits and any benefit that is calculated by reference to a fund, so any transfer between two money purchase schemes is a transfer of flexible benefits.
A deferred member of an occupational money purchase scheme with flexible benefits has the right to a transfer value up to the date of crystallisation of benefits, even after they have reached the scheme's normal pension age.
Those with an uncrystallised individual money purchase arrangement can choose to transfer the fund whenever they wish to.
Pension Transfer Value issues
The FCA uses the term pension switching to describe transfers between money purchase schemes. Reviews conducted in 2008 and 2012 concluded that many firms were giving unsuitable advice on the grounds that the;
Switch involved extra product costs without good reason
Funds recommended were not suitable for the customers attitude to risk
The adviser failed to explain the need for, or put in place, ongoing reviews when they were necessary, and new line switch involved loss of benefits from the ceiling scheme good reason.
The FCA has published a pension switching template that applies to transfers from money purchase agreements into a personal pension or sip. The objective of this template is to ensure that advisors reached the correct conclusion as to whether a money purchase transfer is best advice for a client or not.
When considering whether to transfer pension funds you should consider the following;
The charges on the ceding scheme and the new scheme
Past performance of investment funds
Analysis of any existing with profit funds
Transfer penalties and or market adjustment factors
Guaranteed annuity rates, guaranteed bonus rates and or guaranteed growth rates
Proposed investments within the new scheme and whether these were available within the ceding scheme or within a cheaper alternative
Any life cover or ancillary benefits that will be lost on any transfer.