Currently, a relevant UK individual can contract out of S2P by way of an appropriate personal pension, and before 2003 the same could be done with contracting out of SERPS. This option will no longer be available by April 2012.
Protected Rights arise from the reinvested rebates from National Insurance Contributions. A protected Rights pension may consist solely of national insurance contribution rebates, or include rebates, personal pension contributions and even employer contributions. Rebates are invested directly into the personal pension and can be invested in the same funds as your personal contributions.
Protected Rights contributions
An individual can contract out by way of completing a CA1542 form. Once completed, your private pension will receive the rebates on an annual basis after the end of the tax year, usually the following September or October.
You will continue to earn rebates until any of the following
- You decide to contact back in
- You earn less than the lower earnings limit of £5,044
- You become unemployed or self employed
- You decide to work abroad
- You decide to join a contracted out occupational scheme
- April 2012, at which point this option is no longer available.
Protected rights pension – why contract out?
Many individuals lost trust with the government in general and where of the view that they would prefer to have more control of their retirement funds and not be at the mercy of government changes to state benefits. However, it is the general view that those that have contracted out into protected rights pensions are now worse off than if they remained contracted in. This is why the government has decided to cease this option come April 2012.
Protected rights pension at retirement
As it stands there are conditions that have to be met with regards to protected rights benefit at retirement. This is all set to change in 2012 and it would be wise to contact a specialist pension adviser in order to see how these changes may affect you.
Currently, these special conditions are:
- Annuity rates have to be on a unisex basis
- Death benefits for a surviving spouse must be set at 50%
- On death before retirement your entire protected rights pension must be used to provide a pension for the surviving spouse