Special Pension Benefits

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If you are considering a pension transfer or consolidation, it is important to understand what special pension benefits you might lose were you to switch. Many pension policies come with benefits attached for remaining with that scheme. These benefits can vary from one policy to another, so it is vital to double-check the finer details of your paperwork or speak to your pension provider directly to gain total clarity over what you are entitled to.


Speaking of clarity, Hilltop has developed this glossary of terms to help you to understand some of the most common special pension benefits* currently available. 

Guaranteed Annuity Rate (GAR)

A guaranteed annuity rate (GAR) is a benefit attached to certain pension schemes that guarantees a member can purchase an annuity from the same provider at a pre-agreed percentage rate. This provides a valuable guaranteed income for life that can be significantly higher than current annuities available on the open market. Unfortunately, GARs are mostly consigned to pension schemes that were marketed in the 1980s and 90s, when annuity rates were far more generous. GARs come with various terms and conditions as well as restrictions, such as a set retirement date. Bear in mind that a GAR will be lost if you transfer your pension benefits to another pension provider. Therefore, it is a legal obligation to seek independent financial advice if you are considering transferring a pension worth £30,000 or more that has a GAR attached.

Guaranteed Minimum Pension (GMP)

If you were a member of a public sector defined benefit pension scheme between 1978 and 1997, you may be entitled to a Guaranteed Minimum Pension (GMP). During that time frame, some employers automatically contracted out members from the State Earnings Related Pension Scheme (SERPS) to reduce their National Insurance (NI) liabilities. As a result, the government guaranteed a minimum pension income for life in the form of an annuity, based on the equivalent sum a saver would have received had they remained in the SERPS. Transferring your pension would risk losing this benefit. Therefore, you must, by law, seek the guidance of an independent financial adviser if you are considering transferring a pension worth £30,000 or more that has a Guaranteed Minimum Pension (GMP) attached.

Protected Tax-Free Cash (PTFC)

Most defined contribution pensions enable you to take up to 25% of your pension pot as a tax-free lump sum. However, some occupational pensions and deferred annuity contracts designated before 6 April 2006 enable members to take a lump sum amounting to more than 25% of the fund. This benefit is known as Protected Tax-Free Cash (PTFC). However, you may lose this entitlement if you choose to transfer to another pension scheme. Furthermore, you could incur greater tax liabilities when you reach the point of taking your pension.

Protected Retirement Age (PRA)

Some pension schemes provide a Protected Retirement Age (PRA), which gives you the right to withdraw your pension earlier than the Normal Minimum Pension Age (NMPA). The current NMPA is set at 55 but is set to rise to 57 from 6 April 2028. Protected Retirement Age only applies to pension schemes that authorised this rare benefit before 6 April 2006. This special benefit is typically reserved for specific professions where early retirement is commonplace, such as footballers, military personnel and models. You could lose this benefit if you were to transfer to another pension scheme. You would then be liable to significant tax penalties should you withdraw pension funds before the age of 55.

Defined Benefit/Final Salary

Defined benefit (DB) pensions, also known as 'final salary' pensions, are based on your total years of service and a proportion of either your final salary upon leaving/retiring or your career average. DB pensions provide members with a secure income for life that rises in line with inflation. Employers contribute to the scheme and ensure there are adequate funds to provide the appropriate pension income at retirement. Although rare, DB pensions are commonplace in the public sector and, to a lesser extent, in the private sector. Transferring from a DB pension would mean losing valuable benefits and could leave you worse off in retirement. By law, you must consult an independent financial adviser before transferring a DB pension with guaranteed benefits worth £30,000 or more.

Life Cover

Some older workplace pension schemes were set up to include Life Cover, or life insurance as it is more commonly known. This ensures that your loved ones are well cared for long after you are gone, with your beneficiaries receiving either a lump sum or regular payments on your death. If you are an active member of a pension scheme that includes life insurance, a lump sum expressed as a multiple of your earnings or pensionable salary at the time of death will be paid to your dependents. If you are considering transferring from a pension that includes Life Cover, you run the risk of invalidating your policy and losing this special benefit altogether.

Pension Attachment and Earmarking

Since 1996, courts in the United Kingdom have had powers to make an order that dictates that part or all of a member's pension benefits (excluding the State Pension) must be paid to their ex-partner when they become payable. Known as 'pension attachment' in England, Wales and Northern Ireland or 'pension earmarking' in Scotland, this type of order is typically enforced as part of the financial settlement during divorce proceedings or the dissolution of a civil partnership. Payments to an ex-partner do not count as taxable income and therefore do not need to be declared to HMRC. Attachment/Earmarking orders should follow any transfer of pension rights to a new scheme, although this is not guaranteed.

Guaranteed Growth/Bonus Rate

So-called 'with-profits' pensions invest funds across a range of assets to spread the risk of market volatility. These types of older pension schemes award an annual bonus that smooths the return on investment, providing a Guaranteed Growth or Bonus Rate for as long as the member remains with the scheme. There are often significant penalties, including punitive exit fees, involved with transferring a pension that has a Guaranteed Growth or Bonus Rate associated with it. These penalties are often referred to as 'market value reductions'. You may also struggle to find another provider willing to accept a transfer if you have this type of special pension benefit.

Pension with Pension Sharing Order

As a significant asset, pensions are taken into account during any financial settlement as a result of a divorce or dissolution of a civil partnership. A pension sharing order allows for a percentage of a spouse or civil partner's pension fund to be paid immediately to the other party, either by way of them joining the existing scheme or transferring it to a new one. Unlike a Pension Attachment or Earmarking order, a Pension Sharing Order enables both parties to make a clean break. However, not all pension providers will accept this type of incoming transfer. Therefore, you should consult with prospective new providers before embarking on a transfer.

Unfunded Government Pension Schemes

Unfunded Government Pension Schemes do not have a central fund and are instead paid by the taxpayer. These types of defined benefit (final salary) pensions are commonplace across many public sector professions, including teachers, NHS, fire service, police and armed forces. Unfunded Government Pension Schemes are the most highly prized pensions available and typically pay a generous income for life. However, because there are no assets to draw upon, these types of pensions cannot be transferred into a defined contribution scheme. Whilst this may limit your flexibility, it does provide a certain level of protection for your hard-earned retirement income.

Loyalty/Fund Bonus

Some pension providers award their members a Loyalty Bonus or Fund Bonus as a reward for remaining with them for a certain number of years. This type of bonus can either be paid in the form of a lump sum or as part of a rebate on your annual management fees. The precise details will depend on the specific terms and conditions of your policy. However, a common denominator with any pension fund that offers a Loyalty or Fund Bonus is that you will automatically forfeit your entitlement to this benefit if you decide to transfer to a different scheme.

Guaranteed Conversion Option (GCO)

A Guaranteed Conversion Option (GCO) enables members to convert their pension into a fund that provides broader and more flexible benefit options. A GCO can also apply to supplementary insurance benefits attached to some pensions, such as Life Cover or Critical Illness Cover. In these cases, a GCO allows you to upgrade a basic insurance policy to a more beneficial whole-life policy or new endowment on a predetermined date. Once again, it is worth remembering that you would lose this guarantee should you decide to transfer your pension.

Safeguarded Benefits

Waiver Of Premium Benefits

Some pension policies include a Waiver of Premium Benefits, which is effectively an insurance policy for your pension contributions. As such, if you become incapacitated due to illness or injury and are unable to work for 26 weeks or more, your insurance provider could continue to pay your pension contributions on your behalf. Contributions will continue to be paid until you reach pensionable age, recover or begin taking your pension benefits. If you were to leave or transfer your pension, you would lose this valuable special benefit.

Critical Illness Cover

Some pension schemes may include Critical Illness Cover as part of the policy's benefits. This form of insurance provides a degree of financial protection in the event that you fall ill and are no longer able to work to earn a living. Should you be diagnosed with one of the illnesses listed in your critical illness policy, your provider will pay out a lump-sum to cover everything from everyday household bills to ongoing care fees. Of course, you will likely forfeit your rights to this benefit should you decide to transfer your pension to a different policy or provider.

Section 9(2B) Rights (Contracted Out)

Section 9(2B) Rights provide benefits to pension savers who were contracted out of the State Second Pension (previously known as SERPS) as part of a contracted-out salary-related scheme (COSR). This benefit is enshrined in the Pension Scheme Act 1993 and is the successor to Guaranteed Minimum Pensions. Section 9(2B) Rights effectively mean that any benefits accrued prior to the abolition of contracting out on 6 April 2016 are protected and must be paid out by the pension provider. However, if you choose to exit or transfer this type of pension arrangement, you will almost certainly lose this entitlement.

* If your pension is subject to one or more of these safeguarded benefits, we cannot transfer your funds to our non-advised digital provision. Our advisers can discuss your options with you in more detail.

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