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Pensions Tax Manual

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Transfers: Transfer of drawdown pensions

Glossary PTM000001
   

 

Section 169(1D) Finance Act 2004

Regulation 12 The Registered Pension Schemes (Transfer of Sums and Assets) Regulation 2006 - SI 2006/499

It is possible to transfer of sums and assets held under a

  • drawdown pension fund
  • flexi-access drawdown fund
  • dependant’s drawdown pension fund
  • dependant’s flexi-access drawdown fund
  • nominee’s flexi-access drawdown fund, or
  • successor’s flexi-access drawdown fund

to another pension scheme.

However in addition to meeting the normal rules for a recognised transfer (see PTM100010) the transfer will only be a recognised transfer if all the sums and assets of the relevant drawdown fund are transferred as part of the transfer. A transfer of only part of one of the types of drawdown funds listed above cannot be a recognised transfer.

Transfer must be to a new arrangement 
New drawdown fund must be on a like for like basis 
Transfer of drawdown funds where entitlement arose before 6 April 2006
Tax treatment after transfer

Transfer must be to a new arrangement

Regulation 12(1) The Registered Pension Schemes (Transfer of Sums and Assets) Regulation 2006 - SI 2006/499

Unlike the transfer of scheme pensions and annuities there is no requirement that a transferred drawdown fund must be used to provide drawdown pension under the new scheme. This is because a drawdown pension can be converted to either an annuity or scheme pension after funds have been designated into drawdown. However the sums and assets representing the transferred drawdown fund must become held under a new arrangement that holds no other sums or assets. If this is not the case the transfer will not be a recognised transfer.

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New drawdown fund must be on a like for like basis

Paragraphs 8D & 22D Schedule 28 Finance Act 2004

Where the transferred drawdown funds are used to provide a drawdown pension under the new scheme it must be on the same basis. So a transferred flexi-access drawdown fund must provide flexi-access drawdown, a transferred nominee’s flexi-access drawdown fund must provide nominee’s drawdown and so on.

If the transferred fund is providing either member’s or dependant’s capped drawdown pension the default position is that the new scheme must also provide capped drawdown pension. This allows members to transfer capped drawdown pension funds to another pension scheme without triggering the money purchase annual allowance rules (see PTM056500).

However as part of the transfer process for capped drawdown funds the member can tell the scheme administrator of the receiving scheme that they wish the funds to be designated as a flexi-access drawdown fund. Unless they already apply to the member, the money purchase annual allowance rules will apply immediately before the first payment is made from the flexi-access drawdown fund under the new scheme. Dependants can also convert to flexi-access drawdown when transferring by telling the scheme administrator of the new scheme that they want the funds to be designated as a dependant’s flexi-access drawdown fund.

Without any specific nomination by the member or dependant the funds must be used to provide capped drawdown pension or capped dependant’s drawdown pension as appropriate. The member or dependant can still decide at some later point to convert the capped drawdown pension to flexi-access drawdown using one of the methods described at PTM062750 (for members) of PTM072330 (for dependants).

If the member or dependant wants the funds to go straight from capped drawdown pension to flexi-access drawdown following the transfer they must take action and notify the scheme administrator accordingly. A scheme administrator cannot do this without a nomination from the member or dependant. This is because without a nomination the legislation automatically treats transferred capped drawdown funds designated into drawdown pension under the new scheme as providing capped drawdown pension.

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Transfer of drawdown funds where entitlement arose before 6 April 2006

Paragraph 8(1AA) & (1AB) Schedule 28 Finance Act 2004 as inserted by Article 29 The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572

A drawdown pension fund or flexi-access drawdown fund representing a drawdown pension that started before 6 April 2006 must be kept in a separate arrangement from other scheme funds. It cannot be merged with any other drawdown funds. Because of this ring-fencing requirement, no further contributions should be paid to the arrangement, and so no additional fund designations can arise.

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Tax treatment after transfer

Regulation 12(2) The Registered Pension Schemes (Transfer of Sums and Assets) Regulation 2006 - SI 2006/499

If the transfer is a recognised transfer then for certain specific purposes the sums and assets transferred are treated as remaining under the original arrangement. These are described below.

Transfer of member’s drawdown pension fund or flexi-access drawdown fund

The designation of transferred fund into either drawdown pension fund or flexi-access drawdown fund under the new scheme receiving the transfer is not a BCE 1. No entitlement to a pension commencement lump sum can arise from the transfer.

If the transfer took place on or after 6 April 2010 the member is treated as having reaching normal minimum pension age under the new scheme if they had reached normal minimum pension age under the old scheme. This for example allows a member who became entitled to benefits before 6 April 2010 aged 50 to 54 (when the normal minimum pension age was 50) to transfer their benefits to a new scheme whilst they are still under the current normal minimum pension age. Any pension payments made by the new scheme whilst the member was under the current normal minimum pension age wouldn’t be unauthorised payments just because the member hadn’t reached the current normal minimum pension age.

Where the member hasn’t chosen to switch to flexi-access drawdown on transfer the new scheme will pay capped drawdown pension. The conditions relating for calculating the maximum drawdown pension continue under the new scheme on the same basis as the old scheme. The:

  • drawdown pension year,
  • 3 year reference period (where the member is under 75)
  • basis amount for the drawdown year, and
  • nominated date

(see PTM062520 onwards) all continue on the same basis under the new scheme as if no transfer had taken place. This ensures that the maximum capped drawdown pension and timetable for review of the maximum amount is not changed because of the transfer.

For transfers made on or after 6 April 2011 but before 25 March 2013 see also RPSM14106040 on the National Archives website.

Transfer of dependant’s capped drawdown pension fund

Where the dependant hasn’t chosen to switch to flexi-access drawdown on transfer the new scheme will pay capped dependant’s drawdown pension. The basis for calculating the maximum dependant’s drawdown pension will continue under the new scheme as if it was original pension. The

  • drawdown pension year,
  • 3 year reference period (where the dependant is under 75)
  • basis amount for the drawdown year, and
  • nominated date

(see PTM072330 onwards) all continue on the same basis under the new scheme as if no transfer had taken place. This ensures that the maximum capped dependant’s drawdown pension and timetable for review of the maximum amount is not changed because of the transfer.

For transfers made on or after 6 April 2011 but before 25 March 2013 see also RPSM14106040 on the National Archives website.

Transfer of dependant’s, nominee’s or successor’s flexi-access, drawdown funds

There are no special provisions modifying the tax treatment following the transfer of these types of drawdown funds.