What are protected rights pensions?
Protected rights pensions are pensions set up when you opt out of the State Second Pension (S2P, formerly SERPs).
They are set up with part of your National Insurance contributions rebate from government, which becomes due to you when you contract out of the S2P.
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You are entitled to redirect the National Insurance contributions rebate into your own private pension or pension plan, for example your company pension scheme or a personal pension. The advantage of doing this is that you have more control over where your pension savings are invested, rather than leaving those decisions and that control with government.
If you had not contracted out of the State Second Pension, that income would have been payable to you on retirement only as a regular pension payment, and would have been subject to tax. With protected rights pensions, however, you will be entitled to take 25% of your resulting savings as a tax-free lump sum.
Protected Rights Pensions – only until 2012
The option to save into protected rights pensions will be withdrawn by the government in 2012, however. It is possible to continue saving into a protected rights pension until then.
Cash in protected rights pensions can be invested in a wide range of investment funds, commerical property and other investment types. You can also combine funds in your protected rights pension with other pensions you may have, and invest them as one fund.
A protected rights pension can be taken by the holder from age 55, and since 2006, it is no longer the case that an annuity purchased with protected rights pension funds has to increase with a fixed rate escalation of 3% per year.
One restriction on protected rights pensions is that, when used to purchase an annuity, this annuity must provide a compulsory survivors pension for your spouse, upon your death. This survivors pension must be equal to 50% of the income from the protected rights pension.
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Protected Rights Pensions can transfer to SIPPs
Until recently, protected rights pensions were regarded by the government as part of the state pension, as they were built up from rebates of National Insurance contributions.
Because of this, the government insisted that a protected rights pension be managed cautiously. For that reason, funds in protected rights pensions could not be invested in self-invested personal pensions (SIPPs), which can be higher risk. This changed however, and since October 2008 it has been possible to invest protected rights pensions in self-invested personal pensions.
SIPP pensions can contain a range of other investments, including government securities, unit trusts, equity funds, bank deposit accounts, commercial property, and works of art. They are particularly favoured by business owners who own the building where their company is located, as that building can be sold as an asset to the SIPP, thus realising cash from the value of the property. The business then pays a rent to the SIPP to occupy the building.
However, cash allocated to protected rights pensions must still be ‘ring-fenced’ within SIPPs, and is subject to the special rules that apply to taking funds in protected rights pensions.
