An unusual question on Block Transfers

I was recently asked a question concerning the operation of the ‘block transfer’ rules, in the context of a member’s entitlement to take ‘scheme-specific protected cash’. In particular, my enquirer was considering a case where the member has been the subject of multiple ‘block transfers’.

By way of background here, members who, on 5 April 2006, had a right to take a ‘tax-free lump sum’ of over 25% of the value of their benefits on that date may – subject to meeting certain conditions – retain their right to take a Pension Commencement Lump Sum of over the usual 25% limit. This is known as having scheme-specific protected cash.

This is legislated for in Paragraphs 31 – 34A of Schedule 36 of the Finance Act 2004 (noting that the version on the legislation.gov.uk website is not currently fully up to date with the latest changes).

One of the conditions to be met for a member to be entitled to scheme-specific protected cash? (known as ‘Condition B’) is:

Condition B is met if the individual is a member of the pension scheme ( “a transferee pension scheme” ) as a result of—

(a) a block transfer from the pension scheme ( “the original pension scheme” ) in relation to which condition A is met to the transferee pension scheme, or

(b) a block transfer to the transferee pension scheme from a pension scheme that was a transferee pension scheme in relation to the original pension scheme by virtue of the previous application of paragraph (a) or the previous application (on one or more occasions) of this paragraph.

[Paragraph 31 (7), Schedule 36, Finance Act 2004]

This is where the concept of a ‘bock transfer’ comes in, and sub-paragraph (b) above allows for scheme-specific protected cash entitlements to be preserved following multiple bock transfers.

?So far, so good. It appears that a member can retain their scheme-specific protected cash right following a series of block transfers. The question that my enquirer asked, however, is what happens if, as a result of any of those transfers, the individual ends up back in a scheme they had previously been a member of? Suppose the individual had a scheme-specific protected cash right under Scheme A, then block transfers to Scheme B, then to Scheme C and finally back to Scheme A. Can this cause them to lose their scheme-specific protected cash right?

To consider this, we need to understand exactly what a ‘block transfer’ actually is. Fortunately, this term is defined in Paragraph 31 (8) of Schedule 36 as follows:

“Block transfer” has the same meaning as in paragraph 22(6) and (6A) [of Schedule 36 of the Finance Act 2004], but treating the references there to the member as references to the individual, and reading paragraph 22(6A)(c) as if its reference to paragraph 22(7)(a) were a reference to sub-paragraph (3) of this paragraph.

Looking at Paragraph 22 (6) referred to here, this says:?

A transfer is a block transfer if—

(a) it involves the transfer in a single transaction of all the sums and assets held for the purposes of, or representing accrued rights under, the arrangements under the pension scheme from which the transfer is made which relate to the member and at least one other member of that pension scheme, and

(b) either the member was not a member of the pension scheme to which the transfer is made before the transfer or he has been a member of that pension scheme for no longer than such period as is prescribed by regulations made by the Board of Inland Revenue.

Sub-paragraph (b) here imposes a maximum time limit on how long the individual can have been a member of the receiving scheme in order for the transfer to be a block transfer (and thus to preserve a scheme-specific protected cash entitlement). The Regulations in question here are The Registered Pension Schemes (Block Transfers) (Permitted Membership Period) Regulations 2006 [SI 2006 / 498], with the key text being:

2 Permitted membership period for block transfers

(1) For the purposes of paragraph (b) of paragraph 22(6) of Schedule 36 to the Finance Act 2004 the period prescribed is a period of twelve months ending with the date on which the transfer is made (“the prescribed period”).

(Note that there is an exception here where, prior to the transfer in, the receiving scheme was a contracted out Personal Pension and the member’s benefits under that scheme consisted solely of Protected Rights. In such cases, that membership period is ignored.)

Returning to Paragraph 22 (6) (b) above, the term “member” is a defined term by reference to Section 151 of the Finance Act 2004 and means:

151 Meaning of “member”

(1) In this Part “member” in relation to a pension scheme, means any active member, pensioner member, deferred member or pension credit member of the pension scheme.

From all of this, if an individual had been an active, deferred etc member of any scheme for more than 12 months, a transfer back into that scheme cannot be a block transfer and any right to scheme-specific protected cash falls away.

In terms of my enquirer’s question then, a purported block transfer back to Scheme A could indeed cause the individual to lose their scheme-specific protected cash right.

This point is touched on in the final two paragraphs of the guidance in the PTM under ‘Transfers’ here.

As to exactly how any receiving scheme would necessarily know that any individual transferring to them as part of a purposed block transfer had previously been a member of that scheme for more than 12 months and that, as a result, any scheme-specific protected cash entitlement is lost, is not a point that is addressed in the legislation.

It would appear that it would ultimately be for the scheme that intends to receive such a transfer to establish whether or not the block transfer rules are met (as they would be the scheme that would ultimately pay out any scheme-specific protected cash), although I would also consider that the transferring scheme should undertake due diligence here, to ensure that they do not inadvertently cause any transferring member to lose their scheme-specific protected cash entitlement.

Aries Insight?provides comprehensive and detailed guidance on the application of the scheme-specific protected cash rules, 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.