Higher Relief, Higher Risk

The Government has finally decided to make changes to Protected Rights by abolishing some forms of contracting out. This will aid and simplify the pensions system and offer important opportunities for pension holders. These significant changes come into effect from the new tax year in April for pensions built up on a defined contribution basis such as stakeholder or personal pension arrangements.

Protected Rights are the benefits accrued within a pension from a time when the individual or their company’s pension arrangement contracted out of the State Second Pension (S2P), formerly known as the State Earnings Related Pension Scheme (SERPS).

Instead of building up secondary state pension, the government pays an annual rebate into the individual’s plan for the time they are contracted out.

Several years of rebates, along with some reasonable growth, have seen some significant Protected Rights benefits.

As it currently stands, individuals who are or have been members of a contracted out arrangement accrue Protected Rights benefits.

Pension holders crystallising any Protected Rights benefits by way of an annuity must incorporate a 50% spouse’s pension where they are married or within a civil partnership.

A joint life annuity will obviously provide a lower income than on a single life basis. These annuity rates are also calculated on a unisex basis which disadvantages men who statistically have a shorter life expectancy than women.

From April, individuals will no longer be compelled to buy a spouse’s benefit or unisex benefit, unless they wish to, giving them greater flexibility and potentially a higher annuity income.

As well as a benefit to annuitants, these changes will impact on those with larger pension pots wishing to take advantage of flexible drawdown through the Minimum Income Requirement (MIR).

Currently individuals that can secure a guaranteed income of £20,000 by way of State pension, an annuity, a scheme pension or a final salary pension can take the remainder of their pension benefits as a lump sum.

25% of this amount is tax free with the remainder taxed at their marginal rate.

Those benefits which are Protected Rights currently cannot be used as part of flexible drawdown benefits. From April this will change, meaning that pension holders can in theory withdraw a far greater amount of pension.

This legislation change is great news for many future retirees, giving them far more flexibility and choice as to which pension benefit best suits their circumstances.

Pension holders with smaller pension pots will no longer be forced into providing for a spouse who may not require any provision at a time of historically low annuity rates. The changes will enable a higher single life annuity income to be sourced.

In addition, those with far larger pots and with other secured pension income will, in theory, be able to extract larger sums from their pensions. This will offer individuals and their advisers greater opportunities around Inheritance Tax Planning and the passing on of wealth.

Matt Hawkins
Chartered Financial Planner
MillionPlus Financial Planning