Protected rights contributions

MOUNTY

In my personal pension plan i have 'protected rights' contributions ( 35% fund value). Is it correct that i cannot receive payment until retirement age 66.
If so, do i receive 25% lump sum tax free on that as well as 'non protected rights'?

Cautious_Investor_3

Hi

Based on current rules you can access PR funds at age 55 and can take a 25% tax free lump sum from the same age.

Who knows what the rules will be when you get there though!

The Cautious Investor

dunstonh

Is it correct that i cannot receive payment until retirement age 66.

No.

Protected rights is built up from contracting out of SERPS/S2P. If you contract out, you get the benefit of being able to take benefits from age 55. If you contract in, those benefits built up can only be taken at your state pension age (which would appear to be 66 in your case).

MOUNTY

dunston wrote: »

No.

Protected rights is built up from contracting out of SERPS/S2P. If you contract out, you get the benefit of being able to take benefits from age 55. If you contract in, those benefits built up can only be taken at your state pension age (which would appear to be 66 in your case).

I was advised to contract back in, that in future everyone has to.
Therefore if i draw my pension at 55 i would receive only 65% of my fund (35% PR). I should now look at topping up my monthly payments to build up the equivalent loss

jamesd

MOUNTY, generic suggestions to contract back in has been sent by some pension providers, without considering the personal circumstances of the particular investors involved. If you'll need the money at 55 due to retirement or want it to be available then it could still be a perfectly good plan for you to stay contracted out. This may also apply if you're single and expect to be single, because you wouldn't need the spouse provision that's built in to the state pension calculations - this means that it's easier to get ahead by contracting out if you're single. It's also expected that the requirement to by a sex neutral annuity will go away, which would increase payouts for men and decrease them for women.

The income difference at age 65 between being contracted out and contracted in is quite small. It gets larger in your favour if you're younger than lat 40s and against you as you get older than that. But it's still small for a few years either way. By the time you reach your mid fifties or older the difference starts to really strongly favour staying contracted in. Around the late 40s it's easy enough to shift the balance in favour of contracting out if single, if male, if you'll need the money sooner or if you'll use more aggressive investments than those used in the assumptions.

Those who contact back in can continue to take the money from age 55 for money that they have already had paid into a personal pension. Contracting back in only prevents new money from being paid in, it has no effect on the money you already have.

The current plan is that from the 2012 tax year the difference between protected rights and other pension contributions will vanish and pension providers will no longer need to track which money was from rebates and which from your own direct contributions. Also from 2012 the ability to contract out into a personal pension is currently planned to go away.

From age 55 you'll be able to take benefits from 100% of your fund, including the protected rights part and including taking a 25% lump sum from both parts.

All of this assumes that the rules haven't changed by the time you reach 55.

dunstonh

I was advised to contract back in, that in future everyone has to.

When you use the word "advice" you have to be careful of its meaning. Advice is what a financial adviser gives. If a provider has bulk transferred you back in because they say its better for you that doesnt necessarily mean its best advice for you. What it means is that their pension is unsuitable to be contracted out in and they want to protect themselves from future complaints.

For example, I have a Pearl contracting in everybody back in 2003. The reason was they stopped paying annual bonuses in 2002 and there was no way the growth (or lack of) could make it better to be contracted out with that pension. Plus, the pension is damned expensive and that has an impact. Now that doesnt mean the person should have been contracted in. A modern pension with another provider could have had the right investments and charges and contracting in could still have been right.

The issue becomes irrelevant next year anyway as its the last year to contract out with money purchase schemes.

Therefore if i draw my pension at 55 i would receive only 65% of my fund (35% PR). I should now look at topping up my monthly payments to build up the equivalent loss

Assuming its money purchase then something there is not correct. Protected rights is available. If its final salary then its a different matter but you mention 25% and final salary schemes dont work on that basis.