Schemes with both DB and DC sections
Some DB schemes may have a defined contribution (DC) section running alongside the DB arrangement. In such cases, it is important to ascertain whether the DC arrangement is established as a separate registered pension scheme to the DB arrangement or if they are both within the same registered pension scheme. This is important for several reasons:
- Under the legislation, the PCLS must be paid from the same scheme under which the member becomes entitled to their pension income. If the DC is in the same scheme as the DB rights, it will mean that, rather than commuting the scheme pension to provide PCLS, it would be technically possible to pay the PCLS from the DC section. This will of course be subject to the rules of the occupational pension scheme. It is important to ascertain the options that are available to scheme members in order to provide suitable advice.
- Under Inland Revenue Pre-A-Day rules, it was not possible for an individual to build up a tax-free cash (TFC) entitlement under a DB scheme (where the TFC was a multiple of pension, i.e. 3n/80ths or n/60ths) greater than 25% of the pension entitlement as at A-Day. Therefore, scheme specific protected cash is not going to apply to the DB scheme. However, where the Pre-A-Day DC arrangement was in the same exempt approved occupational pension scheme, and the scheme rules allowed for any TFC to be paid from the DC arrangement, it is possible for an individual to have built up a Pre-A-Day TFC entitlement of more than 25% of the pension rights. Therefore, it is important to understand how the DC is set up and the options open to members under the scheme’s rules.
... if an individual has scheme specific protected cash it will be lost on a transfer, unless that transfer complies with HMRC block transfer rules as set out in the Pensions Tax Manual, page PTM063150. However, if a transfer is successfully made under the block transfer rules, it is important to understand that, when benefits are taken, to benefit from PCLS greater than 25%, all the member’s benefits under the registered pension scheme must be crystallised at the same time. So, that rules out phasing of benefits, so if that is critical for the client, the scheme specific protected cash is irrelevant.
It is important to ask the scheme administrator if it is possible to transfer one element of the scheme and not the other. Assuming there is not a requirement to transfer both together, the suitability report must make clear that each element has been considered separately. It is not appropriate to switch the DC element by default just because the main DB arrangement was transferred.
This is the first of a series of short guides that we will be publishing over the coming weeks. The theme of the guides is how to avoid common pitfall when advising on pension transfers from defined benefit schemes.
If you provide transfer advice then this and subsequent articles will be of interest.
ATEB has commissioned these guides as a service to our clients. They were created for us by Paul Clark, a pension technical specialist. If you wish to explore how Paul might help with your pension advice problems, visit the RUSSELLDENE Consulting website (see link below) or email Paul directly on firstname.lastname@example.org