Question about planned SIPP transfer

mrodent33

Hello,

To take advantage of a 1% cashback offer offered by a platform called Freetrade, some time ago I initiated a SIPP transfer from my current provider, Interactive Investor.

I just got a secure message from Interactive Investment informing me of a particular limitation which Freetrade imposes on SIPPs held with it (which it describes on its website):

We are writing about your requested transfer out from ii to Freetrade Limited SIPP.

We wanted to bring to your attention to the fact that the product you are looking to transfer to with Freetrade currently does not offer the facility to take pension benefits through Flexi Access Drawdown, when you attain Normal Minimum Pension Age. The Freetrade website confirms this as noted below:

"Withdrawing money from your Freetrade pension
Cash that you put in your pension is intended for retirement. You will not be able to access money that you invest in your Freetrade pension until you’re 55 (rising to 57 in 2028), except in special circumstances, such as serious illness.

At present, Freetrade only offers a form of withdrawal called an “uncrystallised funds pension lump sum”. This is a payment taken from a pension, out of which you have not previously taken funds through another method, like a drawdown fund. This kind of withdrawal can impact the amount that you’re able to save into your pension in the future.

If you’re considering withdrawing money from your pension in the next few years, it’s important that you speak to a suitably qualified financial adviser to understand your options."

However, we thought it would be prudent and wanted to bring to your attention a recent communication from HMRC with regard to pension Schemes that do not offer customers the chance to take pension benefits through the Scheme and the potential action that HMRC could take against that Scheme: Newsletter 152 — July 2023 - GOV.UK (www.gov.uk).

As with all situations such as this we would suggest that you seek the guidance of a suitably qualified financial adviser or contact MoneyHelper (www.moneyhelper.org.uk/en) for guidance.

We would appreciate if after seeking this guidance you could confirm in writing whether you still wish to proceed with the transfer out.

So I had a look at that HMRC newsletter and couldn't understand the relevance particularly.

Secondly, I have no intention of withdrawing any money from my SIPP for, say, the next 4 years minimum. So I'm quite prepared to transfer my SIPP out of Freetrade to some other provider once I've kept the SIPP with them for the required time (December this year), if this "uncrystallised" restriction proves problematic.

Could someone please explain in simple terms what this restriction means? Also, is this restriction unusual? Thanks

Sam_666

I take it you fully researched product before you invested in it.
You must have also read this bit on Freetrade website:

At present, Freetrade only offers a form of withdrawal called an “uncrystallised funds pension lump sum”, or UFPLS. UFPLS lets you take flexible lump sums from your pension, without using drawdown or buying an annuity. Each UFPLS withdrawal from your Freetrade SIPP costs £240.

QrizB

If you're planning to switch again before retirement, Freetrade's restrictions on withdrawals aren't going to be an issue.

Marcon

https://forums.moneysavingexpert.com/discussion/comment/81981395#Comment_81981395

…which would mean another transfer and therefore a minimum of two periods of out of market risk where transfers can't be done in specie. Not sure I'd see 1% cash back as sufficient incentive.

At present, Freetrade only offers a form of withdrawal called an “uncrystallised funds pension lump sum”. This is a payment taken from a pension, out of which you have not previously taken funds through another method, like a drawdown fund. This kind of withdrawal can impact the amount that you’re able to save into your pension in the future.

Could someone please explain in simple terms what this restriction means? Also, is this restriction unusual?

If you want to access cash from your pension but still go on contributing, UFPS would mean that you'd trigger the Money Purchase Annual Allowance, because you have to take taxable cash at the time you take tax free cash. That means you would be permanently restricted to £10K a year contributions to your SIPP (personal + tax relief + employer).

It's a relatively uncommon restriction in modern contracts. Whether it is important to you depends on your personal circumstances - if you're never going to pay in that sort of amount, it may be irrelevant, but on the other hand… The UFPS route would also add to your taxable income in the year you make a withdrawal, which if you're still earning, could bump you into a higher tax bracket.

mrodent33

@Marcon

Thanks for the explanation.

"out of market risk where transfers can't be done in specie".

The transfer is indeed being done in specie. Plus I would only ever transfer out in specie.

As I say, I have no intention of withdrawing anything from the SIPP for at least 4 years.

mrodent33

@ Sam_666

"I take it you fully researched product before you invested in it."

"in it"? What do you mean? I did some research about Freetrade generally: FCA registered, charges, etc. But I currently know hardly anything about the modalities of withdrawing cash from a SIPP. As I say I have no intention of touching it for at least 4 years. So my main point of interest currently is "can I transfer the SIPP out of Freetrade in due course if I want to."

Marcon

The transfer is indeed being done in specie. Please don't make such assumptions.

I didn't make an assumption. I pointed out a possible scenario which someone with little knowledge of pensions would need to take into account when considering transferring from one scheme to another.

You can't predict whether any future transfer out of Freetrade can be done in specie, so the point is both relevant and important.

DRS1

What ii seem to be suggesting is that there may be a risk that the Freetrade SIPP would be deregistered. Can that possibly be right if it allows only UFPLS? Would an UFPLS payment not be covered by section 164(1) (b)?

The Newsletter says this

"We’d like to remind pension scheme administrators that pension schemes must be established and maintained wholly or mainly for the purpose of making payments falling within section 164(1)(a) or (b) (authorised payments of pensions and lump sums).

Where a scheme does not allow the payment of benefits or has terms and conditions that suggest the scheme will not pay out benefits on normal retirement (for example if a customer wants to take a pension then they have to transfer their funds to another registered pension scheme first), it is unlikely to be satisfying the wholly or mainly test.

HMRC will consider de-registration of pension schemes that do not meet this requirement."

The Freetrade SIPP would seem to fall within the first paragraph OK.

Presumably the thinking is that if you don't want to use UFPLS but want to use FAD you have to transfer to another scheme. That may fall foul of the highlighted bit in the second paragraph.

I would assume that if there was an issue Freetrade would be given the chance to introduce FAD as an option. But suppose they don't. How quickly would a deregistration take place? If you still had money in the SIPP when it was deregistered you would then presumably be unable to transfer it to another registered pension scheme. And presumably there may be tax consequences. I assume people would want to avoid that and so Freetrade customers would be given plenty of notice to transfer out in advance of deregistration but that is complete speculation. You could find yourself up a creek without a paddle.

Albermarle

 Also, is this restriction unusual?

Freetrade are a very low/zero cost SIPP provider. Withdrawing from a pension is more 'admin heavy' for the provider, than just adding to one. So Freetrade only offer a very basic and expensive withdrawal option.

Most pension providers offer much more flexible, and usually free withdrawal options, but then their regular fees are higher.

mrodent33

"I would assume that if there was an issue Freetrade would be given the chance to introduce FAD as an option. But suppose they don't. How quickly would a deregistration take place? If you still had money in the SIPP when it was deregistered you would then presumably be unable to transfer it to another registered pension scheme. And presumably there may be tax consequences. I assume people would want to avoid that and so Freetrade customers would be given plenty of notice to transfer out in advance of deregistration but that is complete speculation. You could find yourself up a creek without a paddle."

Thanks for reading the newsletter and thinking this through.

Your final idea strikes me as quite an extreme pessimist scenario: the idea that you wouldn't be able to transfer out so your entire pension pot would just become "money". I may be naive as hell but I'd think you'd be given a clear opportunity to transfer out (and if you didn't they'd probably send the men in white coats to come for you…).

And if they do allow this uncrystallised thing to happen, probably they argue that a customer is not "obliged" to take their scheme to another provider.

With little knowledge of the functioning of SIPP industry players (or the rules, or likely future developments of them), I have to take a chance of being handed 5k cashback … or not … A little uneasy, but free money is awfully tempting.

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/81981480#Comment_81981480

Agreed. You pays your money you takes your choice. Very low /zero cost service would ring alarm bells with me. They are not in business to make a loss, so surely have to make money somewhere else? Ryan Air and luggage springs to mind….