Block transfers – why use them and how they work
Jessica List, Pension Technical manager, Curtis Banks, examines the reasons why clients may want or need to carry out a block transfer to protect pension benefits and the rules applying to the transfer
It’s more than fourteen years since A-Day, but the ‘transitional’ arrangements built into the rules to protect against potential adverse effects of the changes still affect many clients today. We quite frequently talk about issues facing clients with enhanced and primary protection, and the challenges facing people when the funds which they crystallised before 6 April 2006 need to be valued for one lifetime allowance reason or another.
It’s perhaps less frequently that we discuss protected pension ages and protection tax free cash (PCLS) entitlement. Administering such benefits is complex. With protected pension ages there may be lifetime allowance reductions to consider; with protected PCLS, there’s the challenge of calculating how much the entitlement is currently worth (as with so many things pension-related, there’s revaluing involved).
Moving these benefits can be a challenge too, as both types of protection are fixed to a particular pension rather than the individual themselves. Why not just stick with the original protected pension? There could be any number of reasons:
Investment opportunities: One of the biggest variables between different types of pensions is the range of investment options available. Perhaps the client is looking to access one particular investment provider; others may want to hold a wide range of investment solutions at once and need the ability to change them frequently. Most clients will probably be somewhere in the middle – in any case, investment opportunities is a key reason clients may consider changing provider.
Retirement options: It’s probably fair to say that we’re all acutely aware of how quickly the best laid plans can change. Clients may be more aware of the benefit of having access to flexible options when it comes to accessing their pensions, allowing them to shape their retirement in a way which works for them– with the scope to adapt their approach if needed.
Provider suitability: Advice firms’ due diligence on product providers is incredibly important. If a provider does not have an appropriate level of capital adequacy or financial stability, it might be time for a client to change provider.
Consolidation: Moving multiple pensions into a single product is still a popular option for many clients. Only having to deal with a single provider and one set of fees can save considerable time and money. Where protected benefits are involved there may be additional considerations, however, which we’ll come back to later on.
Clients with a protected pension age or protected PCLS entitlement might decide to transfer for any one (or more) of these reasons. However, in order to successfully transfer and keep their protected benefits intact, they will need to complete a block transfer. There are a few conditions which need to be met in order for a transfer to be classed as a block transfer.
Firstly, at least two members have to move from the same original scheme, to the same new scheme. It’s not enough for these transfers to just happen to take place around the same time – the transfers have to be arranged together at the same time as part of a single agreement, or single transaction. In practice, this means that the adviser (or clients) will send a single piece of correspondence to the new provider to begin the process, making it explicitly clear that the transfers should be requested together as part of a block transfer. The new provider will then follow a similar process when requesting the transfers from the original scheme. The transfers don’t have to physically take place on the same day – practically speaking it might not be possible, particularly if one or more takes place in specie – but there has to have been a clear intention for them to be processed as a single agreement. It’s also worth noting that not every party in a block transfer has to have protected benefits; however, the process has to be followed for everyone in order for the person (or people) with protected benefits to keep them.
The second condition is that the person (or people) with protected benefits can’t have been a member of the new scheme for more than 12 months – it has to be a new scheme for them. It shouldn’t cause problems if, for example, the pension is transferred in specie and the transfer isn’t fully finalised until the 12 months has elapsed. However, it couldn’t be a block transfer if 12 months has elapsed before the transfer is even requested.
The third requirement is that all funds and assets are transferred from the original scheme. If the client only completes a partial transfer, the original scheme will retain the protection (although the amount of protected PCLS may be reduced) but there would be no protection on the new scheme.
There is a final condition for clients to keep their protected pension age or PCLS entitlement following a block transfer, which is sometimes not considered up front as it is not part of the transfer itself. The client must crystallise everything in the new pension at the same time in order to keep their protection – including any other funds which may have been contributed or transferred into the same scheme.
This brings me back to clients who may be completing a block transfer in order to consolidate their pensions. Many clients now choose to crystallise their pensions in stages, often in order to spread their PCLS entitlement over a number of years and make more tax efficient use of their savings. This condition, therefore, needs to be considered early on as it will affect the client’s later plans for accessing their pensions.
Depending on the client’s situation, there may be options to explore. For example, a client with protected PCLS may be able to complete their block transfer first and crystallise the pension at that point when it only contains the block-transferred funds. They could then look to complete the remaining transfers after that crystallisation had taken place. This will involve some careful planning, not least because it will depend on the new provider’s processes and systems, but it can be an option worth exploring in the right circumstances.
Block transfers can seem tricky, but meeting the requirements is normally more than worth it for the client to keep their protected benefits when a need to transfer arises.