DB Pension Transfers – Unexpected additional tax bills after giving up safeguarded pension benefits

This article is relevant to those who have been a member of a defined benefit (DB) pension scheme, expect a pension of more than £30,000 per annum and have not yet retired.

Have you transferred your benefits out of a DB pension scheme into a self-invested personal pension (“SIPP”) or other money-purchase pension arrangement, or may plan to do so in future?

Giving up “safeguarded benefits” in your DB pension scheme during a transfer process requires you, through regulation, to obtain suitable advice from an independent financial adviser. However, Congruent has seen many instances of such advice that failed to take the “relevant valuation factor” into account, which has led to unexpected additional tax bills in (£) six figures.

The “relevant valuation factor” is a highly technical aspect of the transfer process. When a person retires from a DB pension scheme, their annual pension is valued, for the purposes of computing whether they exceed the “lifetime allowance”, by applying a factor (the “relevant valuation factor” – usually 20). But after a pension transfer, the factor used is an actuarial factor which depends on interest rates and mortality and can be more than 30. So for a pension of say £50,000 per annum and an actuarial factor of 30, this means a pension is valued at £500,000 more than if it had left the pension benefits in the scheme. The lifetime allowance charge rate is 25%, so that means £125,000 more tax.

Congruent has an online redress calculator for DB pension transfers that enables you to check approximately what actuarial factor might apply to a pension. If transfer advice did not take the “relevant valuation factor” into account we provide a claims management service.