What are Protected Rights? ** Contracting Out Ended 5th April 2012 **
Part of your National Insurance Contributions are used to pay for your Basic State Pension. In addition, some of your contributions used to also pay towards a second tier State Pension called the State Second Pension (S2P), it used to be known as SERPS (State Earnings Related Pension Scheme).
For most working employees therefore, they used to building up TWO state pensions. However, either via a private pension or your company pension if you had one, you could elect to 'contract out' of the State System just for this second tier pension and have it paid into your own pension. This is where your 'protected rights' came in.
Contracting out of The State Second Pension via an appropriate Personal Pension or Stakeholder Pension and for some money purchase company pension schemes was and generally still is known as 'Protected Rights'. Your 'protected rights' rules are detailed on this page.
Whenever National Insurance rebates have been received into investment linked pensions, they are called Protected Rights and are built up separately from any other contributions made to the scheme.
Protected Rights were not allowed to be converted into a tax free cash and a pension income before 6 April 2006, you could only receive an income but Pension Simplification laws now allow people to receive a tax free lump sum up to 25% of the fund value with the balance buying an income.
Pension Income Increases
When Protected Rights funds were converted into your pension income they used to have to be linked to increases in the Retail Prices Index but capped at:
- 3% a year if the rebates received related to earnings prior to 5th April 1997
- 5% a year if the rebates received related to earnings after 5th April 1997
Under Pension Simplification Laws you now do not have to purchase an increasing income.
Death and Protected Rights
On death after the Protected Rights pension was taken by the member, the pension it provided must continue at half rate (50%) to the member's spouse (as long as they have children or are over the age of 45).
On death before the Protected Rights pension is taken by the member, the whole of the Protected Rights fund has to provide a pension income for a surviving spouse or civil partners.
If there is no surviving spouse or partner, the Protected Rights fund can be paid as a lump sum to the estate of the member if it was not being paid as an income before death of the member.