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Revenue rules on tax-free transfers

HM Revenue and Customs has ruled out the possibility of transferring tax-free cash from a pension scheme into an unsecured pension with a different provider.

The industry had requested clarification on whether unvested pension funds can be transferred from one scheme to a new scheme offered by another provider, with the intention of going into an unsecured pension with the new scheme.

The lump sum would be paid to the member under the original scheme by the original provider before the transfer.

HMRC says that if the funds in the original scheme are not already in an unsecured pension fund before the transfer to the new scheme then any lump sum paid under the first scheme by the original provider would not be a pension commencement lump sum and would represent an unauthorised payment.

Under the 2004 Finance Act, pension commencement lump sums can only be paid when a member become entitled to a relevant pension under the scheme. A relevant pension can include income withdrawal, a lifetime annuity or a scheme pension. If the member is not entitled to take income withdrawal from the unsecured pension fund under the scheme, the Revenue says that funds have not been made available for the payment of a relevant pension under that scheme and so any lump sum will not be a pension commencement lump sum and will be an unauthorised payment.

Aegon head of pensions development Rachel Vahey says: “We have received a lot of calls about this and there seems to be confusion in the market. I am pleased that this has now been clarified.”


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