With effect from 6th April 2012, Protected Rights will be no more!!
To clarify, Protected Rights is the value of benefits accumulated as a result of contracting out of the State Second Pension (S2P) or prior to that the State Earnings Related Pension Scheme (SERPS) via a defined contribution pension arrangement such as Group Money Purchase occupational pension scheme or a Personal Pension Plan (PPP). By default, Non-Protected Rights is the value of benefits accumulated by way of personal or employer contributions.
Firstly, with effect from 6th April 2012, the ability to contract out via such arrangements will discontinue, with all individuals consequently being automatically contracted back in.
Simultaneously there will cease to be a difference in the treatment of existing funds, bringing about some welcome simplification.
At one time there were a number of differences between Protected and Non-Protected Rights, but ‘Pension Simplification’, which became effective on 6th April 2006, commonly known as ‘A Day’, saw a number of these removed. Benefits could be drawn at any time beyond minimum retirement age, 25% tax-free cash could be taken and the statutory requirement to inflation proof income was abolished.
So what are the key changes here and now. First and foremost, there will no longer be a compulsion for those that are married or in a civil partnership at the time they take benefits to purchase a statutory widow or widowers pension of 50%. Furthermore, the guaranteed period of 5 years will no longer apply, allowing one to choose no guarantee or a 10 year period.
Male clients can avoid annuity purchase using financially detrimental unisex annuity rates, although with the European directive coming into force later this year abolishing the current differential between male and female annuity rates, this will be a short lived benefit for those retiring in the next few months.
For a small minority there may two further benefits. Those with secure incomes of at least £20,000 per annum will be able to utilise Flexible Drawdown on these funds, where at present this is not permissible.
Finally, for those with protected tax-free cash entitlements greater than the statutory 25%, which exceeds the actual value of their Non-Protected Rights funds, the fact that all funds will now be classified as the same may allow them to utilise their protected entitlement to the fullest.
Should you have any queries, please do not hesitate to contact us.