Know your Rights!

From April 2012, Contracting Out will be abolished under a defined contribution pension plan.

What is Contracting Out?
It is where you opt out of the State Second Pension (S2P) previously known as State Earnings Related Pension Scheme (SERPS) and instead divert some of your National Insurance Contributions into an ‘Appropriate Pension Plan’. These ‘rebated’ payments are known as ‘Protected Rights’ and have the potential to grow in your personal pension similar to any regular contributions you or your employer may make (Non Protected Rights). Consequently you do not build up any ‘state second pension benefits’ (an addition to your ‘Basic State Pension’).

Why is Contracting Out being abolished?
Benefits from your ‘rebated’ National Insurance contributions into a personal pension can vary depending on investment returns and annuity rates. It is therefore difficult to predict if an individual would be better off in the State Second Pension or Contracted Out. To help simplify the system and decisions about retirement savings the government is deciding to abolish Contracting Out.

How will I know if I am Contracted Out?
Any statements received from your pension provider will show any National Insurance contribution rebates you are currently receiving as a result of contracting out.

So what is happening?
From 6th April 2012 you will automatically be contracted back into the Second State Pension. The money already paid in from Contracting Out will remain in your pension plan as ‘Retirement Fund’ which is all contributions and transfers paid into your plan which consisted previously of ‘Protected Rights’ and ‘Non Protected Rights’ (yours or your employer’s contributions).

What about accrued Protected Rights?
There are currently certain restrictions on the benefits that can be provided from these rights. If you use the pension plan to provide an annuity in retirement and are married or in a civil partnership, you must also provide an annuity to your spouse / civil partner payable on your death of at least half of your pension. Also if you die before buying an annuity your spouse / civil partner is obliged to use any remaining fund to provide a pension as opposed to receiving a lump sum.

From 6th April 2012 these Protected Rights will convert to ‘Non Protected Rights’ and collectively be known as your ‘Retirement Fund’. The restrictions noted above for Protected Rights will be removed and all treated as the same.

If you are in any doubt or have any specific questions regarding the above legislation changes or indeed any aspect of your retirement planning please contact us with no obligation on 01626 833225.

The above comments do not constitute financial advice and you are advised to obtain appropriate professional advice before proceeding further.