New regulations on protecting tax-free cash post A-day

The situation concerning tax-free cash and transfers of pensions after A-Day appears to have been resolved by HM Revenue & Customs after representations from pension and life companies.

After pensions simplification reforms come into force, the government is limiting the maximum amount which can be taken from a pension fund as tax-free cash to just 25%, however, at present some schemes allow clients to take more, so new rules will have to take into account protection of this entitlement.

Up until now it was thought people in occupational pension schemes and Section 32 (S32) transfer plans could protect their entitlement to a larger lump sum, providing they didn’t transfer their funds after A-day, as their protection would then be lost.

But over the last few weeks, the rules have developed to define two separate situations where schemes can transfer funds after A-day while still keeping their tax-free cash entitlement.

Those who transfer their pensions within a “block transfer” for example - i.e. when two or more people transfer at the same time to the same registered scheme - will be able to maintain their protection. So if an occupational scheme transfers to a group pension plan, then the tax-free cash entitlement could be kept. If one person went to a pension plan with one provider, and another person from the same scheme went to a different provider, however, then the protection would be lost.

The newest - and most interesting category - concerns the winding-up of an occupational pension scheme and or executive pension plans where people are transferred to a deferred annuity contract or S32 plan, and allowed people to maintain their tax-free cash.

Under this arrangement, even where the scheme in questions is an existing, S32, individuals can still keep its tax-free cash protection after A-Day as long as it transfers to another S32 plan.

That said, HMRC has also set down certain rules for the third category of transfer which is currently eligible for protection of the tax-free entitlement.

According to life office officials, new rules indicate:

Rachel Vahey, pensions development manager at Scottish Equitable, says the change in rules is welcome.

"It means a host of other people will be able to keep tax-free cash protection after A-day, especially for those who are transferred to a trustee-proposed S32 without their permission. However it is not clear cut. Advisers should be aware of the options for their clients and make sure any necessary advice is given before A-day,” says Vahey.

Alasdair Buchanan, group head of communications at Scottish Life, adds: “Essentially, these new rules are a good thing. Under the original legislation people in occupational schemes that were being wound-up had no control over where their funds were being transferred and as such they could lose their tax-free cash entitlement," says Buchanan.

"The Revenue has now indicated that individuals moving into a S32 will retain their previous level of benefit. Under previous rules, the need to switch before A-day has meant that some providers have been urging IFAs to advise their customers to switch as soon as possible which has had the potential to be portrayed as a “buy now while stocks last” situation."

He continues: “The new outcome is a much more measured approach, which doesn’t involve rushing to beat a deadline. Transfers can now be done as and when it is appropriate without disadvantaging the client. There have been quite a lot of comments from the industry about the problems of advising clients on the best way to protect their tax-free cash entitlement, so it is to the credit of the revenue for listening to the comments of the industry and making the relevant changes.”

But not everyone is quite so enthusiastic about the developments.

Ian Oliver, head of pensions at Norwich Union, says: “There are a lot of occupational schemes that are being wound up and the problem is how best to protect the tax-free cash entitlement, which for some people can be 50% or more.

The initial solution was that S32s did the job quite effectively, but they are not appropriate for everyone and are perhaps not as flexible as a sipp. The new regulations can be seen as a concession for some providers who were recommending transfers to S32s six months ago, but there is no advantage to transferring into an S32 for the majority of people.”

Oliver continues: “Moving from one S32 to another is not going to help the customer, what would help is if they could transfer into a sipp or personal pension. We were lobbying for more flexibility as it doesn’t serve the customers very well if they can’t get out of an S32 without losing their entitlement. Having said that, the regulations have helped a bit, but in practical usage people can’t transfer out of S32s without the aid of a block transfer, which as S32s are individual policies, can’t be done. So really the new rules haven’t actually moved anything forward.”

Claudine Lashley, a spokeswoman for HMRC, says: “These draft regulations set out our current position and were issued on the basis of representations which were submitted by both representative groups and individuals. We listened to each representation and took those views into account. These rules are the results of that consultation process, but we have also received and are considering new representations since the publication of the draft regulations.”

If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email nyree.stewart@incisivemedia.com.