Protected Rights
By Danny Cox | 01 Aug, 2008
I mentioned in a recent article that from October you will be able to transfer Protected Rights pension money into your SIPP. Almost everyone that I have spoken to about this article has asked me what Protected Rights are and what is “protected” about them. So here is the answer;
This explanation is not very exciting (as much as I have tried to make it interesting), so please don’t read this if you have just had a big meal, a glass of wine or a late night.
But what is happening as a result is very important. More about this later.
Protected Rights pension money comes from contracting out of the State Second Pension or S2P, or its’ predecessor, SERPS (the State Earnings Related Pension Scheme). If you are contracted out of the second tier of state pensions, part of your national insurance contributions is paid to a personal pension of your choosing. In the case of company pension schemes, some are contracted out and the money is paid there.
This money is paid or rebated into a pension as an alternative to the second, earnings related, state pension. This means that when you contract out, you get less second state pension but have money paid into a pension that might provide you with more or less pension than if you had remained contracted in. Generally people contracted out if they felt that their pension investments would do better than the pension the state would provide.
This money is known as Protected Rights since under old rules, there were restrictions on how you took benefits: You could not take tax free cash; the pension could not be taken until age 60; and the pension taken had to include a Widow (er)’s benefit and had to escalate. These rules or protections, ensured that the pension you bought was a reasonably close match to the way that the second state pension is paid.
It follows that money you save into a pension from salary is not subject to these restrictions and therefore is known as “non protected rights” money.
Over the years the protections have been reduced to the extent that now there is less difference between protected and non protected rights than ever before and we expect protected rights to be abolished completely in 2012 - hooray.
Why not SIPP –able?
The powers that be were concerned that those who had contracted out would invest their money with great risk, and if they lost this pension money, there would be an increased chance that the SIPP holder would have to rely on the State. Essentially, if the Government provide back up through Pension Credit and Minimum Income Guarantee (surely on the shortlist for the World’s most complicated pair of state benefits) then people would take big risks with their funds knowing that there was something to fall back upon.
Of course this argument holds no weight since most personal pensions that accepted protected rights already had access to insurance company funds that included fund links to smaller company funds and emerging markets. And those who contracted out generally were also pension savers as well so would be less likely to be in need of minimum income guarantee at retirement.
The results
Protected rights will be allowed in SIPPs from 1st October 2008 and that makes sense: Yes, you can increase the risk of your protected rights monies but you can aim to reduce the risk of losing money by choosing funds or managers who have good track records and better expectations of future returns - of course remember that investments can fall as well as rise and past performance may not be a guide to future performance.
Am I contracted out?
Not quite the $64,000 question (or £32,000 at today’s exchange rates) but hardly a surprise that most people are unclear whether they are or not contracted out. If you keep getting statements from a pension provider saying that money is being paid in as a “rebate” this almost certainly means you are still contracted out. You can ask your pension provider or contact www.thepensionservice.gov.uk.
If you are contracted out, you should review whether or not you should continue to do so, on a regular basis. The levels of rebates are lower than in the early days and the combination of poor markets and in many cases, old, poor pension products, means that you risk getting back less than you would have done had you remained contracted in.
It is fair to say that if you have any doubts, contract back in. Indeed many insurers have been doing so on mass over the last couple of years.
If you have an old contracted out pension languishing in a drawer, you can register your interest in transferring this to a HL SIPP. We have thousands already on the list and we are still 3 months away.
I am towards the top of this list (it is alphabetical - there are no strings being pulled here) and will be adding my protected rights pension money to my Vantage SIPP Account. This isn’t just a saving of one or two pieces of mail less a year, it is the peace of mind of knowing that it is all in one place where I can see it, track it and make fund changes etc. It is one less company to phone when/ if I change address and it makes it so much easier to align with the rest of my portfolio.
Click here to register your interest in transferring your contracted out pension.
