Block transfers for a new generation

Although block transfers have been a feature of the pensions landscape since A-day, the strict requirements which apply to them can trip up even experienced advisers. What’s more, the increase to the normal minimum pension age (NMPA) to 57 from April 2028 introduces a new twist on the rules when transferring pension rights with a protected pension age of 55. Whilst well intentioned, this is likely to murky the waters.

This article will discuss when and why a block transfer is needed, explain the mechanics of block transfers, and highlight some of the quirks to be aware of regarding the impact on protected pension ages and scheme-specific lump sums.

What is a block transfer?

A block transfer, also known as a “buddy transfer”, is where two or more members of the same scheme transfer their pension rights simultaneously to the same receiving scheme.

The purpose of a block transfer is to allow members to retain scheme-specific protections after the transfer. These are the right to a protected pension age, allowing them to access their pension before the NMPA, and entitlement to a scheme-specific lump sum which grants the member a tax-free lump sum of more than 25% of their benefits.

Block transfers were originally intended to protect members with pre-A-day entitlements which could be lost if they were ‘forced’ to transfer, usually as part of a bulk transfer. Ultimately a ‘bulk transfer’ proved difficult to define, and the final rules instead allow members to carry out a block transfer regardless of the reason for the transfer. This makes block transfers a valuable tool to help your clients achieve their retirement goals without having to sacrifice their scheme-specific protections. There are many reasons why someone might want to transfer their pension, not least to take advantage of the pension freedoms that may not be available in older occupational schemes that offered scheme-specific protections.

The conditions

To retain a scheme-specific lump sum or a protected pension age following a transfer, it must be completed as a block transfer. Special block transfer rules have been introduced for those with a protected pension age of 55, which I’ll explore in a later section. In all other circumstances, there are three conditions which must be met to qualify as a block transfer:

1.Two or more members must transfer together.

All members involved in the block transfer must be transferring from the same transferring scheme to the same receiving scheme. There’s no requirement for either member to have a scheme-specific protection, so any other member of the scheme can act as a buddy for the purpose of a block transfer.

This means block transfers aren’t usually possible for members of single-member schemes, such as retirement annuity contracts and deferred annuity contracts (including section 32 policies). The exception is where a single-member scheme is winding up and the member’s rights are used to purchase a deferred annuity contract.

The rules were relaxed temporarily between 19 March 2014 and 6 April 2015 where the buddy requirement was waived, provided the member also accessed all of their benefits under the receiving scheme at the same time by 5 October 2015. This allowed an individual to transfer on their own – and from a single-member schemes – to take advantage of the new pension freedoms and keep their protection.

2.All sums and assets relating to those members must be transferred, and this must be done as a single transfer.

There might be administrative reasons why the assets aren’t all transferred on the same day. For example, in specie transfers will involve assets settling at different times, and cash may only be transferred after all other assets have settled. It’s also not uncommon for additional cash to be transferred at a later date following completion of a transfer, often due to receipt of dividends or interest from investments.

Fortunately, schemes can take a pragmatic approach. As long as the transfer completes in a reasonable timeframe and relates to a single instruction it will usually meet the block transfer condition.

A partial transfer won’t qualify as a block transfer, but it won’t cause protection to be lost under the transferring scheme either. In the case of scheme-specific lump sums however, a partial transfer would reduce the value of the lump sum payable.

3. None of the transferring members can have been a member of the receiving scheme for more than twelve months prior to the date of transfer.

Membership of a scheme includes pension credit members, beneficiary’s pensions, and pensioner or deferred members, as well as those who are actively building up benefits. However, note the later section about protected pension age of 55+.

The receiving scheme can’t unilaterally decide a block transfer has taken place; the transferring scheme must confirm this. The transferring scheme will also need to provide details of the protection in place and the co-transferees.

It’s worth bearing in mind a scheme can’t be compelled to make a block transfer, although its decision not to allow one should be made on a fair and reasonable basis. This is the position that the trustees of the British Steel Pension Scheme chose to take, reasoning that block transfers were administratively complex, and they would need to make significant changes to their systems and processes to accommodate them. They didn’t believe they could justify this at a time where they would be processing a large number of transfers.

The complexity involved in a block transfer will vary from scheme to scheme. Many are well-equipped to process block transfers and support them regularly. It’s important to check with the transferring scheme administrator whether they’ll facilitate a block transfer, even if all of the three conditions are met.

Multiple scheme-specific lump sums

Care should be taken where the member has scheme-specific lump sum protection under more than one scheme. Protection is retained through a block transfer by treating the receiving scheme as if it were the original protected scheme. Whilst that’s fine where only one scheme is being transferred, if the member consolidates all their pension rights only the protection in respect of the first block transfer will be retained.

Protected pension ages

A protected pension age applies to all rights held in a scheme, up to the point of crystallisation. This means that following a block transfer of uncrystallised funds with a protected pension age, the member could make additional contributions or transfer in further uncrystallised funds which would all be able to benefit from the same protection. Once the member has crystallised, any new contributions or transfers subsequently added to the scheme can only be accessed from the NMPA.

A further point to note is if a member is transferring a pension which is already crystallised under a protected pension age, they can transfer to another scheme and continue receiving income without having to complete a block transfer. In other words, the right to a protected pension age is ‘locked in’ at the moment a member takes benefits. This wasn’t always the case – before 6 April 2015, if the member wanted to switch schemes, they had to continue doing block transfers in order to keep withdrawing income before the NMPA.

2028 NMPA increase

The NMPA is increasing from age 55 to 57 from April 2028. Anyone who already has a protected pension age under previous rules retains this, and the normal block transfer conditions continue to apply to them.

But a new protection regime has been introduced to allow some individuals to retain access to their benefits from age 55, provided they and their scheme meet certain requirements.

These individuals can individually transfer to another – ‘age 57’ – scheme and keep the earlier protected age for the transferred benefits only (in other words not for new contributions to the new scheme or any benefits that were already in the new scheme).

They can also ‘block transfer’ to an ‘age 57’ scheme so that all the benefits in the new scheme will receive the protected earlier age. This includes contributions paid in after transfer and any benefits already built up in the new scheme. However, there are two key differences when compared with the old block transfer rules.

Firstly, the 12-month membership requirement has fallen away. Members who have a protected pension age under the new regime can complete a block transfer to a scheme they’ve already been a member of for more than 12 months and retain their protection. Successive block transfers can be made without impacting the protection.

Secondly, unlike previous protected pension ages, there is no requirement to crystallise all benefits at the same time to make use of the protection.

It may be challenging for schemes to ring-fence 2028 protected pension rights from other funds in the scheme if an individual transfer is completed, and there remains some question whether all ‘age 57’ schemes will facilitate paying benefits earlier where age 55 protected funds are transferred in.

Even though the NMPA isn’t increasing until 2028, these new rules are already in effect, impacting transfers since November 2021. There is room for confusion with both the old and new rules running alongside one another – it would have been far simpler to replace the old rules, or to do away with the block transfer requirement entirely.

Good planning will be essential to help navigate these changes. Block transfers were originally intended to protect pre-A-day entitlements, but now a new generation will need to consider protected pension ages as part of their retirement planning and their use may be renewed.