The Impact of Partial Transfers Out

I was recently asked a question concerning partial transfers out and the possible impact on various types of “protection” in the post April 2024 world. Although the query was raised in the context of a member of a mixed benefit scheme transferring out just their money purchase benefits to a master trust scheme, for this article, I will look at the general rules relating to partial transfers out (partial TV out).

Scheme Specific Protected Cash

In the context of Scheme Specific Protected Cash, we have to consider the impact of a partial TV out on both the benefits being transferred out and the benefits retained in the scheme.

Impact on transferred benefits

The member will lose any right to scheme specific protected cash on the benefits transferred. A right to scheme specific protected cash can only be retained after a transfer where the transfer is part of a block transfer. As the PTM explains:

“Transferring rights for a member from one arrangement whilst retaining benefit rights in another arrangement in the scheme is a partial transfer and so cannot be [a] block transfer. Those rights that have been transferred to the new scheme no longer have protection. The remaining rights under the transferring scheme retain protection, but the partial transfer will reduce the amount of the protected lump sum in the transferring scheme.”

Impact on remaining benefits

As touched on in the PTM guidance above, where there is a partial TV out in respect of a member who has a right to scheme specific protected cash in the transferring scheme, the member's scheme-specific protected cash in the transferring scheme must be reduced to reflect the partial transfer out.

This involves reducing what would otherwise be the member's scheme specific protected cash under the scheme by "TV / 4", where TV is the value of the sums and assets transferred out of the scheme in respect of the member on or after 6 April 2006.

It is also worth noting that not only is the member's scheme-specific protected cash reduced by "TV / 4", the amount of the scheme specific protected cash calculated before this reduction is made will also be lower than would otherwise be the case, simply because some of the benefits have been transferred out.

Non Standard Allowances

Partial TVs out can also be relevant where a member has what we used to refer to as a protected Lifetime Allowance. Now, of course, Lump Sum Allowance (LSA) and Lump Sum and Death Benefit Allowance (LSDBA) protection. A partial TV out may be relevant where the member has Enhanced Protection or any form of Fixed Protection in place.

Unlike the position for scheme specific protected cash, a partial TV out does not automatically reduce a member’s protected LSA or LSDBA. To take a member with Enhanced Protection (but no A-Day cash rights of over ￡375,000) as an example, such a member has:

- a LSA of ￡375,000; and

- a LSDBA equal to the value of their uncrystallised rights, across all registered pension schemes, as at 5 April 2024.

Both this LSA and this LSDBA then apply in respect of all the benefits the member might take on / after 6 April 2024 under registered pension schemes.

A partial transfer out for such a member does not automatically reduce their LSA or the LSDBA (it will reduce their benefits in one scheme and increase them in another, but is does not automatically impact on the level of the member’s LSA or LSDBA).

Permitted Transfers

From 6 April 2023, where a member has Enhanced Protection or any form of Fixed Protection, it is possible for the member to lose that Protection where:

- a transfer is made that is not a ‘permitted transfer’; and

- the member applied for their Protection on or after 15 March 2023.?

Broadly speaking, the following transfers (including partial TVs) are permitted transfers:

- a transfer from any type of arrangement to a money purchase arrangement;

- a transfer from a cash balance arrangement or defined benefit arrangement to another cash balance arrangement or defined benefit arrangement, but only where the transfer is being made:

?- because the scheme making the transfer is winding up; or

- in connection with a ‘relevant business transfer’ (i.e. where part of a business is being sold or transferred to another company), or

- as part of a ‘retirement-benefit activities compliance exercise’. (This concerns occupational pension schemes where some members only had prospective rights to pension or lump sum benefits payable on death. To comply with the requirements of Section 255 of the Pensions Act 2004, it was necessary to transfer out those members who only had an entitlement to benefits payable on death.)

There is more detail on these situations in the (now archived) PTM pages here (Enhanced Protection) and here (Fixed Protections).

Now, as I mentioned above, from 6 April 2023, these restrictions no longer apply where the member applied for their Protection before 15 March 2023. As the deadlines for applying for Enhanced Protection, Fixed Protection 2014 and Fixed Protection 2014 had all long since passed before March 2023, it is unlikely that anyone with any of these Protections will be subject to these restrictions.

For Fixed Protection 2016, however, the deadline for making an application is 5 April 2025, so it is possible that there will be members with Fixed Protection 206 who will continue to be subject to these restrictions.

Joining a new arrangement

It is also worth noting that, for members who applied for their Protection on or after? 15 March 2023, they can also lose their Protection if they join a new arrangement on or after the relevant 6 April (6 April 2006 for Enhanced Protection; 6 April 2012 for Fixed Protection 2012 etc).

This, however, does not apply where the reason for joining the new arrangement is to receive a permitted transfer (or as part of a ‘retirement-benefit activities compliance exercise’ or an ‘age-equality compliance exercise’).

Summary

For my query above, then, the proposed partial transfer would impact any scheme specific cash entitlement the member might have, but would not cause the loss of Enhanced Protection or any form of Fixed Protection (because the new benefits arising in the receiving master trust scheme would be money purchase benefits).

Schemes and members should, however, be alert to the possible loss of Protection (particularly Fixed Protection 2016) where the member is considering any transfer out.

Aries Insight?provides comprehensive and detailed guidance on the application of LSA / LSDBA Protections and scheme specific protected cash, as well as insight into the meaning and impact of UK pensions regulation and clear guidance on the practical implications for pension providers, trustees, administrators and consultants.? If you are not already an Aries member and would like to find out more about what Aries Insight can offer you, then please drop me a mail at [email protected] or give me a call on 01536 763352.

Please note that?we are not lawyers or financial advisers.?The information above sets out our best understanding of the legislation and how it applies, but should not be taken as constituting legal or financial advice.