Pension Planning Focus

Swindells Financial Planning gives you expert insight into some important retirement and pension planning issues.

The end of “protected rights”

As well as the basic old age pension, it is possible to accrue benefits in an additional state pension, known as the State Second Pension (and previously called the State Earnings Related Pension Scheme).

And up until 5 April 2012, it had been possible to ‘opt out’ of this additional pension scheme and get a rebate of part of your national insurance contribution – which you could invest in a personal “protected rights” plan.

That is now a thing of the past and from 6 April 2012 you cannot opt out – or contract out as it was officially known – and simply have to accrue benefits in the State Second Pension (S2P).

Because of these changes, the government has decided that a protected rights plan should not be treated any differently from any standard pension plan. In fact, some companies have already merged them together.

The removal of protected rights was originally catered for in the provisions of the Pensions Act as long ago as 2008. From the 2012/13 tax year onwards, the future contracting out of S2P into personal pensions ceases and any differences between protected rights and non-protected rights will disappear.

Protected rights have been around since 1988, allowing some people over 20 years to build up pension funds over 20 years from contracting out of S2P, using a stakeholder or personal pension plan.

It was also possible to contract out through your employer’s pensions scheme, but that is not being covered in this article.

It is estimated that the total amount invested in protected rights funds could now amount to around £100 billion. Because these funds have been subject to all sorts of different pension rules, up until now they had to be kept separate from other pension plans.

But the abolition of protected rights now means that:

  • You do not now have to buy a special protected rights annuity, which had to be on a unisex basis. Although, ironically, a recent EU ruling says that from 21 December 2012, ALL annuities have to be unisex
  • It will no longer be compulsory that your annuity has to include a survivor benefit, where you are married or in a civil partnership at the time you purchase your annuity. So you could buy a single life annuity, which would have better rates.
  • There is no longer a requirement that your protected rights pension fund be paid to your spouse or civil partner if you die before retirement. So for example, you could ask for it to be paid to your children or even your grandchildren.

It is now also possible for your investment options to be more flexible. Under the old rules, some pension plans such as SIPPS (Self Invested Pension Plans) were unable to accept protected rights rebates.

You will now be able to make use of these facilities and can consolidate all of your separate arrangements into one existing pension plan, if you wish and it should be appropriate. It will also mean that you can now use your old protected rights pension fund to buy a pension drawdown arrangement or an investment-linked annuity when you retire.

However, it is also important to note that where you have already retired and a protected rights annuity has been purchased, this cannot be changed and any conditions that relate to this annuity will continue to apply.

Finally, although contracting out into personal pensions ceased from 6 April 2012, there is always a time lag and for the next three years rebates may still be made into your plan.


All time low for pension drawdown rates

Annuity rates nowadays must make you despair; they are still at a very low level. And whilst you can buy an ‘enhanced’ annuity if you are in poor health, that is not available to everyone.

An alternative that is widely used is pension drawdown, which is an arrangement where your pension fund remains invested and you draw down a regular income as opposed to buying a conventional annuity.

But the amount you can take as a regular income is capped, unless you have other income of £20,000 per year and are eligible for flexible drawdown.

The rate for capped drawdown is based on gilt yields and for June 2012, the rate is based on an equal all-time low gilt yield of 2.25%.

This means that if you are contemplating retirement in the next few months, you should think very carefully before you make any decisions. If you would like to discuss the situation about generating retirement income, just let me know.

A bigger issue may be facing those people who already have a drawdown arrangement. The maximum rate of income that they can take is reviewed every few years; it used to be every five years and is now three for new or newly reviewed arrangements.

To show the impact on them of the new rate, I have looked at how those facing a review next month will be affected. This is for plans that started, or were last reviewed, in June 2007.

You can see from the table below that they are facing a sharp drop in the income that they can draw down.


Age in June 2007

Age now

Maximum drawdown – male

Maximum drawdown – female








































However, the fall in the maximum drawdown is only part of the story. As I said earlier, the pension fund remains invested.

And historic investment performance means that unless withdrawals have been virtually zero, the fund in June 2012 will be smaller than that in June 2007. So not only is the rate lower, but the fund to which the rate is applied could also be somewhat reduced.

The overall effect can be dramatic. For example, if a 60 year old male life had been drawing income at the maximum rate from his fund, after a review in June he would find that his maximum income would have to fall by about two-thirds from June 2012!

Investment conditions are challenging and you may have to reduce your expectations if contemplating drawdown arrangements.