Change to Pensions – Protected Rights

This article considers the advice issues, both short and long-term, that this change brings to the current private savings market. The short-term issues focus on clients currently considering taking retirement income from pension savings that include a proportion of protected rights. Delaying crystallising these benefits until the new tax year may provide significant additional benefits. The key considerations are:-

Pension Commencement Lump Sum
As part of any retirement process a Pension Commencement Lump Sum (PCLS) is an important choice available to clients. Under current legislation, there is a limit of 25% for any PCLS arising from any protected rights investment. 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. Deferring any benefit crystallisation until 6 April 2012 or later could increase the PCLS available from those contracts.

Annuity provision
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.

Capped income
On a similar vein, clients with protected rights held in Sectio 32 buy out policies cannot, under current legislation, have any income withdrawal from those plans. Delaying any benefit crystallisation event from such contracts, which includes the Section 32 buyout bond, until the new tax year, means full income withdrawal can become part of the client’s retirement income planning.

Flexible drawdown
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, you must remember to balance the benefits of deferring crystallising benefits with the potential issues that continued falls in the markets, annuity rates and GAD rates may bring for the potential income for these clients.

Longer-term consolidation options and issues

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 people.

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 may have resulted in you having to use a personal pension to contract out.

The abolition of protected rights from 6 April 2012 means you should review your existing provisions. You can now  consolidate assets into one registered pension scheme considering other relevant changes in legislation that have taken place since A-Day (6 April 2004).

This may simply require moving the rebate-only personal pension into your occupational pension scheme. However, we will need to ensure the occupational scheme benefits still meets your long-term retirement provision and needs, given that most such schemes offer no alternative income to annuity purchase.

If you have protected pre A-Day tax-free cash of more than 25% within their fund, then any transfer needs careful analysis. The use of block transfers is essential 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 taxfree 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.

These changes in legislation will present new opportunities for consolidation of pension rights for future income planning and more effective investment management of your existing pension rights. This change, like so many, require appropriate financial advice and must be reviewed on a case by case basis. This is to help ensure you build a decent retirement income from existing and future pension savings.