The end of Protected Rights - Census financial planning
Protected rights are funds accrued within pensions from originally contracting out of the State Earnings Related Pension Scheme (or SERPS), which has in recent years been changed to State Second Pension (S2P).
This change does provide various opportunities which will effect some of our clients
Pension Commencement Lump Sum
Since the inception of Personal Pension clients have been able to take a lump sum, now referred to as the Pension Commencement Lump Sum (PCLS), from their non protected rights. A number of years ago this was also opened up to include protected rights, however this is limited to 25%. Certain types of schemes, namely some money purchase occupational schemes and section 32 buy out policies often include protected rights within the investment. In this situation, depending upon the mix of protected rights and non-protected rights, full entitlement to a protected PCLS may not be achievable. Therefore it may be in your interests to defer taking any benefits until 6 April 2012 or later as this could increase the PCLS available from those contracts.
By delaying the purchase of an annuity from current protected rights investments male clients will avoid the need to buy an annuity using unisex, unistatus annuity rates. More importantly, where there is a surviving spouse or civil partner the need to provide a contingent income for that partner within the annuity can be avoided, although this would only really be suitable if the partner had their own pension income.
On a similar vein, clients with protected rights held in s32 buy out policies cannot, under current legislation, have any income withdrawal from those plans. By not taking any benefits, until after 6th April, will mean that full income withdrawal can become part of the your retirement income planning.
Flexible Drawdown is only available to individuals who have a separate guaranteed income, by way of annuity, final salary and state pension, of over £20,000. Currently this is not available for protected rights investments. From 6 April 2012 it will be available for all eligible clients on accounts which previously held such rights.
However, deferring taking benefits can have risks as the investment market could fall suddenly also annuity rates and GAD rates could change reducing the potential future income.
In the past many directors and key employees of limited companies used occupational pensions to fund their retirement provision. Contracts such as small self-administered schemes and executive pension schemes were prominent in the pre 2006 era for such clients.
However, these schemes could only usually accept contracted-in contributions and could not accept rebates for individuals wishing to contract out of the State Second Pension (S2P). This resulted in clients having to use personal pensions to contract out.
With the abolition of protected rights from 6 April 2012 clients could consolidate assets into one registered pension scheme considering other relevant changes in legislation that have taken place since A-Day.
This may simply require moving the rebate-only personal pension into an occupational pension scheme. However, you will need advice to ensure the occupational scheme benefits still meet the your long-term retirement provision, given that most such schemes offer no alternative income to annuity purchase.
Care needs to be taken as some members may have protected pre A-Day tax-free cash of more than 25% within their fund. If this is the case then it may be appropriate to use a block transfer to protect any existing higher protected tax-free cash rights. This will need the transfer of at least one other member of the occupational scheme at the same time. The transfers must go into a scheme that each individual has not been a member for more than 12 months, except if that arrangement only accepted previously contracted out rebates.
If this is not possible, or the occupational scheme is a one-member scheme, then the employer must wind-up the occupational scheme and benefits must transfer to a section 32 policy to provide the same tax-free cash protection. However, for simplicity, you may want to consolidate other arrangements into the occupational scheme before the wind-up, given that section 32 policies have not historically accepted added transfers once set up.
As with most changes in legislation, they are more complicated than first thought and it is best to seek advice from a suitably qualified financial adviser. For more details on how we can help you please contact us on 028 9066 8700.
Paul Dixon FPFS
Chartered Financial Planner
# # #
Census Financial Planning is an independent financial planning practice providing a professional and comprehensive financial planning service, located on the Lisburn Road in Belfast, Northern Ireland.