Your pension - did you have Protected Rights?

Did you know that in addition to the basic State Pension, there is something called the State Second Pension (SSP), (previously SERPS or State Earnings Related Pension Scheme)? Did you also know that you were funding your SSP with National Insurance contributions? Or did you contract out?

Historically, many people chose to contract out of the SSP using a personal pension scheme. Put simply, this meant that the money that would have gone into the SSP went into their personal pensions instead – effectively, they were swapping known benefits from the Government for unknown (but potentially greater) benefits from their own pension scheme

Money which was re-directed in this way was known as ‘Protected Rights’ – as distinct from ‘Non-Protected Rights,’ which was the part of a pension which came from an individual’s own contributions and/or from the contributions of an employer

As part of the Government’s attempts to ‘simplify’ the pension system, from April 6th this year the option to re-direct funds into a personal pension in this way is no longer be available

However, many people – especially high-earners – have built up significant amounts of Protected Rights using the previous arrangement. Many will now be thinking that the only option from April 6th is to leave the funds where they are, keep an eye on their performance and take the benefits as and when they retire. But as one door closed, so another opened and new rules introduced from April 6th have given people who have Protected Rights benefits the chance to transfer the funds if appropriate into Self Administered or Self Invested pension funds

Do I have protected rights?

Pension statements are often notoriously crammed with jargon. making it difficult to see what you’ve got. look for different pots of money on your statement and terms such as ‘contracted out’, ‘SERPS’ ‘NI rebate’ and ‘Appropriate Personal Pensions’. You can also find out if you’ve contracted out by calling the Government’s Contracting Out helpline on 0845 9150 150

What do the changes allow me to do?

You can now hold all your pensions in one plan without having to worry about keeping protected rights separate. You also don’t need HMRC transfer forms to move the money to a different provider

Small Self Administered Pension Schemes and Self Invested Personal Pensions – give you greater control over your pension and allow a much wider range of investments, including commercial property and individual stocks and shares. If you’re a company director, then in some cases it may also be an option to make loans to the company, with repayments then being made to your pension scheme

If you’ve built up benefits within a Protected Rights policy then it would certainly be worth considering the opportunity to consolidate your pension arrangements to obtain potentially greater growth, control of the investment strategy and flexibility in the way in which benefits can be generated from the funds

When you draw your pension

Additional flexibility also exists when considering the options at retirement to provide benefits

Annuity Purchase

From 6 April, a key change is that an annuity bought with protected rights savings will no longer be subject to the unisex, unistatus annuity rates. In addition, for those who are married or have a civil partner, there will no longer be a need to provide a continuing income for that partner on death

These changes will give more choice in the type of annuity that can be bought, and for men, the potential of a higher annuity rate being available (but only until December 21, when unisex annuity rates will be brought in for all personal pensions)

Capped Drawdown- S32 Buy-Out Policies

Previously you couldn’t have income withdrawal from any buy-out bond that held protected rights investments. Now you’re allowed to use income withdrawal as an alternative to annuity purchase, providing your policy allows it

Flexible Drawdown

Flexible drawdown is not available from any protected rights money purchase savings. The abolition of protected rights from 6 April 2012 will allow clients wishing to use flexible drawdown to do so with all of their money purchase savings

Tax-Free Cash

The protected rights change will not affect the tax free lump sum rights of most individuals who are retiring shortly. However, there are individuals who, before April 2006, had secured benefits from occupational pension arrangements with a tax-free cash entitlement that was greater than 25% of the fund they had built up at that time. Where these savings are largely made up of protected rights, these individuals can now benefit from an increased tax-free lump sum entitlement as part of the retirement income process

Inheritance Tax Planning

It is no longer compulsory for protected rights savings to provide an income in the event you die before buying an annuity where there is a surviving spouse or civil partner. Those savings can now instead be paid as a lump sum and be distributed to any beneficiaries as desired without normally being subject to any inheritance tax liability

This creates a need for individuals to review what would happen to their estate on death, and review the beneficiaries to whom any of their pension savings can be paid as a lump sum.

In summary, the changes that came in on April 6 without much fanfare are far reaching and will affect a significant number of individuals with money purchase savings. If you’re one of them make sure you take professional advice and review you’re pension as soon as possible

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