Everything you need to know about the pension transfer “flags” and how it affects your clients

Back in November 2021, the government introduced new rules concerning pension transfers, with the aim of protecting individuals and their savings from scams.

We wrote about this in early 2022, as it seemed that these new rules had caught a lot of financial advisers and planners unawares. And, judging by some of the conversations we have, these rules are still catching people out 12 months on.

This is especially true for bespoke SIPPs such as IPM’s, where the rules mean that transfers to these types of arrangements are more likely to be caught by an “amber” flag.

We always welcome anything that gives individuals greater levels of protection from pension scammers, and we believe these regulations to be well-meaning. However, we think that some of the confusion for advisers is that some providers are implementing the rules with little consistency.

This, is turn, is causing delays and confusion. In some instances, it has even led to detrimental consequences for clients in terms of investments or drawing benefits.

Read on for a recap of these rules, and some tips for working with these regulations in mind.

A recap of the pension transfer rules

As with most government legislation, the rules are not brief. However, we feel that it is worth going through these again.

The rules are formally known as the Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021. This is the first time that the transferring scheme has the legal power to potentially block a pension transfer.

These new regulations apply to both occupational and personal pension schemes, to both defined benefit (DB) and defined contribution (DC) arrangements.

Under the new regulations, a transfer request can only proceed if one of two conditions are met. If this is not the case, the transfer cannot proceed, and the trustees or scheme managers must refuse the request.

Condition 1

Where the transferring scheme is satisfied beyond doubt that the receiving scheme is one of the following types of scheme, the transfer is able to proceed without any further checks:

A public service pension scheme
A master trust authorised by The Pensions Regulator
A collective money purchase pension scheme (CMPS) authorised by The Pension Regulator.

Condition 2

If the receiving scheme cannot be identified as one of the types of schemes as laid out in the first condition, but falls into one of the categories below, further subsequent criteria will need to be met:

A personal pension plan, authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority
A self-invested personal pension (SIPP) regulated by the Financial Conduct Authority
A UK occupational pension scheme where evidence of employment has been provided
A qualifying recognised overseas pension scheme (QROPS) where evidence of a client’s residency status and link to employment is provided.

Where the receiving scheme is identified by the transferring scheme as one of the above, the regulations have introduced several risk warning “flags”, that then translate into a traffic light system to determine the level of risk applicable to the transfer.

The manner in which the transferring scheme is able to proceed depends on the flag that applies.

Green flag

In short, these are those type of schemes laid out in condition one, that are able to be fast-tracked without satisfying any further criteria.

Amber flag

An amber flag can apply where a receiving scheme falls into the list of schemes set out in condition two. It indicates the potential risk of a pension scam.

If found to be present, a transfer to a scheme that has been amber-flagged can only proceed once the client has provided the transferring scheme with evidence that they have taken scam-specific guidance from Money Helper before proceeding.

Criteria that can trigger an amber flag include:

The client cannot show evidence of an employment link or overseas residency, where appropriate
The receiving scheme can accommodate high risk or unregulated investments
The charges levied by the receiving scheme are unclear or high
There is evidence that there is a high volume of transfers to a single scheme or involving a single adviser.

While one or more amber flag criteria being met does not prevent the transfer from proceeding, the step to seek guidance from Money Helper is designed to ensure that the client pauses and obtains further information before proceeding further.

Red flag

While an amber flag may delay a transfer, a red flag will see a transfer stop in its tracks. The criteria for a red flag relate mainly to the financial advice and/or financial adviser involved with the transfer and can include the following:

The client requested the transfer after an unsolicited contact (a cold-call)
The individual adviser or the firm they work for is not fully authorised and regulated
The client has been offered an incentive to make the transfer, or has been pressured
Any evidence requested by the client by the transferring scheme has not been provided
The client cannot show evidence, where requested, of receiving guidance from Money Helper.

How to work with the new transfer rules in mind

The aim of these regulations is to protect individuals from falling victim to pension scams. By this measure, it is likely to succeed.

However, while pension providers come to grips with, and introduce, new processes, there will be an impact on both clients and their advisers when recommending pension transfers that do not satisfy condition one.

Furthermore, where an amber flag is identified, it is the client that must seek guidance from Money Helper. This is not something that advisers or planners are able to do on behalf of their clients.

In instances where an amber flag has been identified and the request to transfer is genuine, this could lead to a delay in the time it takes a transfer to complete. For example, it may take clients some time to access an appointment with Money Helper.

Read about the impact these new rules have had on our clients and advisers, and what advisers and planners can do to benefit clients.

Get in touch

If you have a client interested in transferring their pension, and you want to negotiate the transfer regulations, we can help.

Please contact us. Email info@ipm-pensions.co.uk or call 01438 747151.