RIP Protected Rights 6th April 2012… and yet another tax rise!
We’re afraid the politicians are at it again with yet more changes to pension rules. This time it’s the abolition of protected rights. For pensions geeks (like those at Worldwide) these constant changes provide interesting challenges to be overcome when helping clients plan their retirement.
However, for most of us non-pension geeks these changes can simply seem to be incomprehensible meddling. Worse, they further undermine confidence in the pension industry in general. Note to George Osborne: “Stop mucking about with pensions, we need stability!” Funnily enough, one scheme that won’t be changing is the MPs’ own retirement scheme, a pension scheme that could be described as not so much gold-plated as solid platinum and pebble dashed with diamonds.
Parliamentary pensions aside, this is what will happen to pensions on the 6th of April 2012: Protected Rights in their current form will be abolished (1) and the lifetime allowance for pension saving will be cut from £1.8 million to £1.5million (2). The cut in lifetime allowance may produce an unexpected 55% tax charge to a few wealthy individuals who are unaware or who have been poorly advised; the abolition of Protected Rights, in contrast, will have an impact on millions.
Not sure what Protected Rights are and how this change could affect you? Read on…
In 1988, the Government allowed individuals to opt out of the state additional pension, or State Earnings Related Pension Scheme (SERPS) with some of their National Insurance Contributions (NIC). This scheme is now known as the State Second Pension or S2P. This opt out was known as “contracting out” and many people took up the option.
This meant that instead of NIC going to the government and building up in the SERPS or State Second pension these funds, known as Protected Rights could be credited to a private or company pension scheme. The hope was the fund would grow to provide a larger pension than that promised by the government. This also appealed to people who didn’t trust the government to deliver on what it promised.
There are, however, some advantages to the abolition of protected rights. At present, your Protected Rights fund must be used to purchase protected rights benefits, which have a complex structure designed to provide benefits in place of the additional state pension. From 6 April 2012 these complexities will disappear and former Protected Rights funds will be treated in the same way as other pension funds. This means the need to provide a pension for a widow(er) or surviving civil partner would disappear as would the need to use unfavourable unisex annuity rates which have disadvantaged men.
What action should I take following the abolition of protected rights and other changes?
If you think you may exceed the new lower life time pension saving allowance, or if you think that future growth of your fund means it will be exceeded, seek advice urgently. Otherwise, you may face a nasty unexpected tax bill.
What will happen to me in April if I am already contracted out of the state second pension and have a Protected Rights pension fund?
These schemes will end on 6th April 2012 and you will be brought automatically back into the additional state pension. In other words you will contract back in to the state scheme. The fund you have built up will remain, but it would be an excellent time to review the charges (they are often high in these schemes), the investment performance and how this fits into your retirement plans.
On top of this, we always recommend that you review your retirement arrangements every year and if you are unsure whether the abolition of protected rights and lowering of the lifetime allowance will have an impact on you, consider obtaining professional advice from an Independent Financial Adviser.
Our advisers are here to help you so please do get in touch. To contact our Northern Ireland office, call 028 6863 2692; our Cornwall office – 01872 222422 and you can reach our Southampton office on 023 8064 9674. If you prefer to email, please contact us on info@wwfp.net.
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