Incentives are presently confined to the private sector. Public Sector pension schemes members don’t currently appear to be presented with similar offers.
Types of incentives
Incentives to transfer your pension out of the defined benefit scheme could be presented to you in whatever format your former employer wishes – it’s simply a matter of ingenuity.
Common examples of incentives to transfer could be in the form of:
- an enhancement to your transfer value,
- a cash-in-hand payment,
- an enhancement to your transfer value and a cash-in-hand payment, or
- any other incentive your employer may come up with.
They may be presented by your scheme’s sponsoring employer as being available for a limited period and may be offered on a first-come, first-served basis.
Some employers have offered substantial cash lump sums running into tens of thousands of pounds. This would present you with the opportunity to, say, pay off part of your mortgage, reduce any debt you have, take that holiday of a lifetime or buy a new car, amongst many other opportunities (like starting that business you’ve always wanted).
Prior to 24th January 2007, one problem with a cash-in-hand offer was the conflicting advice that was being given by local inspectors of taxes as to the taxation of these lump sums. Some inspectors of taxes had previously indicated that the cash-in-hand payments were tax free. Others had indicated tax was due under self assessment (through your tax return). There was even a suggestion that capital gains tax may have been payable.
This has now been clarified by HM Revenue and Customs with effect from 24th January 2007 so that from a scheme member’s perspective, income tax and national insurance is payable on any cash incentive paid directly by the employer. However, if the cash incentive is used to enhance the transfer value (rather than being taken by the member as a cash payment), then the member will not be liable to income tax and national insurance if the transfer is to another registered pension scheme.
One concern about these incentives is that you could be tempted by the idea of the cash-in-hand offer so much that you could be persuaded to transfer your benefits in order to receive the cash, even if the transfer is detrimental to your pension benefits. This is a major concern to The Pensions Regulator which has published guidance on its website for employers, trustees and scheme members.
Getting the right information
If you are offered an incentive to transfer-out of your pension scheme this will be accompanied by a Transfer Value Statement detailing your pension benefits and the amount of the transfer value. However, Transfer Value Statements are notoriously short of detail. They rarely provide anywhere like enough information that a specialist financial adviser would need to begin to give you advice on your options.
Obtaining that extra detail can be difficult and time consuming, but you should not be expected to make such an important decision without access to information that you and your adviser will need in order that you can make an informed choice.
It’s not just you who will be affected
If your pension scheme provides additional benefits, which the greater majority of schemes do, then any decision you make will affect not only you - but your dependants too - including your spouse and children.
What to do if you are presented with an incentive to transfer-out?
This is a highly complex area and you should seek the advice of a specialist financial adviser. If you are offered a cash-in-hand incentive take advice on the issue of taxation (these payments are now subject to tax and NI) as well as the merits of transferring and the effect that will have on your retirement provision.
There are many issues you will need to consider including:
- The amount of the inducement and how it is being offered to you;
- The value of the pension benefits that you and your dependants are giving up;
- The security of your pension scheme.
- Do you understand why you are being offered the inducements and who is making the offer?
- Would you be fully covered by the Pension Protection Fund if your employer fails?
- What is your attitude to risk?
This Quicknote shows it is essential that you need to have an understanding of the advantages and disadvantages of incentives, and what effect they can have on your retirement provision. It is important that you get a full analysis of all of the options available if you are considering transferring-out of your pension scheme.
People seldom have identical pensions and you should avoid drawing comparisons with colleagues whose circumstances may at first appear the same but could emerge as having significant differences.
This Quicknote forms part of our Module about Redundancy and should be read alongside the other Factsheets and Quicknotes in the series.
This is not an authoritative document. Seek professional advice from an appropriately experienced and qualified adviser.
Redundancy: Cash incentives to transfer v1.5 Preserved
Last reviewed 12/08/2009