Protected Rights

What are Protected Rights?

Protected Rights are funds held in a pension scheme that are derived from the rebating of National Insurance payments to the scheme where a member has contracted-out of the State Second Pension.

What is the State Second Pension?

When a person reaches state pension age, they will be entitled to the Basic State Pension if they have paid sufficient National Insurance (NI) contributions.

In addition, they may be entitled to receive an additional state pension benefit called the State Second Pension (S2P) if they are employed and earn above a minimum earnings level. This entitlement is calculated separately from the Basic State Pension.

What is contracting-out?

Whilst a person cannot opt out of the Basic State Pension they can choose to opt out of S2P. This is called contracting-out. In return for giving up these S2P additional rights, the Government will pay contributions direct into the person’s chosen pension plan (these are often referred to as National Insurance rebates).

These ‘rebates’ are paid by HMRC after the end of the tax year to which they relate and are calculated as a percentage of their earnings between certain limits (depending on their age). They are automatically allocated to the chosen scheme and are known as ‘Protected Rights’.

Only certain pension schemes can accept Protected Rights (for personal pension schemes, these are called an ‘appropriate personal pension scheme’ or APP for short). You can only contract-out through one scheme at a time, and only for full tax years. 

A person can choose to contract back into S2P for any future tax year, as long as they do so before the end of that tax year.

Can a SIPP accept 'Protected Rights'?

From 1st October 2008, all SIPPs can accept Protected Rights, provided they obtain APP status.

Previously, only certain schemes set up by insurers could allow for a degree of self-investment of Protected Rights.

Is it right that Protected Rights can be separated from the main SIPP funds?

Yes.

At present there are certain restrictions imposed by DWP regarding the paying of benefits from Protected Rights that do not apply to the other SIPP funds (‘Non-protected rights’). We therefore must track a member’s Protected Rights fund separately from your main SIPP funds.

As these rights effectively replace some of the member’s State retirement benefits we would recommend a member seeks independent advice on appropriate investments suitable to their circumstances.

The Government intend to abolish the option of contracting-out through a personal pension in 2012, and part of their plan is to remove these additional restrictions on existing Protected Rights at that time.