Options for transferring the value of your preserved benefits to another pension scheme

The legislation which governs the operation of pension schemes requires benefits to be paid in the form of pensions with limited provision for the payment of lump sums. It is, therefore, not possible to pay the value of your benefits to you as a cash sum. There is, however, provision to take a transfer to other approved pension arrangements.

This involves calculating a ‘cash equivalent transfer value’ ie putting a cash value on your preserved benefits. A cash equivalent is, in effect, the amount of money that it is estimated is needed to pay your Guaranteed Benefits, including the future index linking of your benefits. It does not include the value of Bonus Augmentations. In calculating cash equivalents assumptions are made about the rate of future price inflation, future investment returns and life expectancy.

The expected rate of interest on investments is a major factor in the calculation and changes in interest rates can result in substantial changes in cash equivalent values. You can request a cash equivalent statement at any time up to one year before your pension is due to start. The cash equivalent will be guaranteed for three months. If you decided to proceed with a transfer after the expiry of the guarantee period, the cash equivalent would be re-calculated using current interest rates.

A transfer to a new employer’s pension scheme

If you go to work for another employer in the UK (or sometimes overseas), you may be able to have the cash equivalent of your BCSSS benefits transferred to your new employer’s pension scheme.

If your new scheme pays salary-related benefits, you will be credited with either a period of contributing service or an amount of extra pension. The amount of the credit will be related to your age and your new salary and to the benefits the pension scheme provides.

If your new occupational scheme is a ‘money-purchase’ scheme, the transfer payment would form the basis of your fund in the same way as a transfer to a personal pension.

A transfer to a personal pension

Anyone who has left the Scheme has the right to transfer the cash equivalent of his or her benefits to a personal pension plan or to a stakeholder pension plan. These are sold by a variety of financial institutions including insurance companies, building societies and banks.

Unlike the BCSSS which guarantees you a certain level of benefit on retirement, a personal pension works on what is called a ‘money-purchase’ basis. This means that if you transfer the cash value of your Scheme benefits to a personal pension or stakeholder arrangement the transfer payment would form the basis of your own personal fund. The interest earned, plus any subsequent contributions you make to the personal pension arrangement, would be added to the fund. At your chosen date of retirement the money in your fund is used to buy you a pension (an annuity) at prevailing market rates. It may also be possible for you to receive part of your personal fund as a lump sum.

The part of the transfer payment representing your Guaranteed Minimum Pension would be separately identified as ‘protected rights’. This part of your personal pension fund must be taken as pension and cannot be paid until State Pension Age.

Members may also have the cash equivalent of their Scheme benefits transferred to an individual policy with an insurance company. These policies are sometimes referred to as ‘Section 32 Buy Outs’. They have been largely superseded by personal pensions.

A Warning
In the BCSSS you are guaranteed a certain level of benefit. The Government, as Guarantor, carries the investment risk. With a personal pension, stakeholder pension or Section 32 Buy Out, you will carry the investment risk.

The size of your personal fund will depend on investment performance in the years before your retirement and how the final value has been affected by inflation. The amount of pension and dependants’ pensions which the fund can purchase will, in turn, depend upon annuity rates, which can vary almost daily according to prevailing interest rates.

You may have noticed articles in the media highlighting the practice of ‘pension busting’. You may even have seen TV and press adverts targeting members who have yet to draw benefits. These schemes generally offer deferred scheme members a transfer of benefits and immediate payment of a cash lump sum. You should be wary of being tempted by the lure of immediate cash.

Some of the schemes are fraudulent and police have been involved. None of the transfers are acceptable to the tax authorities – both the receiving schemes and the member concerned deliberately set out to breach Inland Revenue regulations. If you take your transfer value as a lump sum, the Inland Revenue apply a heavy tax charge of either 22% or 40% of the full amount of the transfer. In addition, the people managing the scheme take a large commission, typically anything between 20% and 30%. So pension busting can leave you only with as little as a third of the value of your benefits. It’s a good way of giving money away needlessly. Remember that if you do take part in one of these schemes there will be no pension rights for you when you want to retire or for your family if you die.

If you get to know of a company who is offering to transfer your pension and pay you a large lump sum, you should be cautious. If you are thinking of a transfer, check that it is a valid pension scheme or insurance company. If you don’t, you could be throwing money away. BCSSS will be taking additional steps to prevent such transfers. You may be best advised to seek independent financial advice and you should always ask for confirmation that the scheme is approved by the Inland Revenue. If you are in any doubt you can ask to check the scheme’s Inland Revenue reference number and ask the BCSSS administration office for any further information you may need.