Ten questions clients will ask about the abolition of protected rights

Andy Zanelli takes us through the key issues surrounding the abolition of protected rights

1. When will protected rights be abolished?
A ministerial statement on 15 March 2010 by Angela Eagle, the then pensions minister, announced that contracting-out for defined contribution (DC) schemes is to be abolished from 6 April 2012.

2. What happens to individuals who are currently contracted-out via a DC scheme after 6 April 2012?
Those individuals who are currently contracted-out will be brought automatically back into the additional state pension as from 6 April 2012.

3. What is the additional state pension?
Very simply the additional state pension is offered by the government and provides additional income over and above the basic state pension. Individuals who can build up an entitlement to additional state pension are:
• employed and earning over £5,304 (from any one job)
• looking after children under 12 years old and claiming child benefit
• caring for a sick or disabled person for more than 20 hours a week and claiming carer's credit
• a registered foster carer and claiming carer's credit
• receiving certain other benefits due to illness or disability.

4. From an employer perspective what is the impact on employees from 6 April 2012?
Clearly an individual employer will no longer be able to use a contracted-out money purchase scheme (COMP) or a DC section of a company scheme to contract employees out of the additional state pension. As outlined above, employees may (dependent upon their earnings) begin to build up an entitlement to the additional state pension instead. Additionally, employers will no longer be required to make ‘minimum payment' contributions into a COMP.

5. Will the abolition of contracting-out affect employer and employee National Insurance contributions?
Yes. Both the employer and employee will pay the standard rate National Insurance contributions instead of the reduced contracted-out rate.

6. That sounds serious. Is there any help that the government has offered about the impact on National Insurance contributions?
Clearly this is yet another thing for affected employers to start communicating with their staff about. The government has published a factsheet which employers can give to their employees which provides information on the abolition of contracting-out and what it means for them.

7. Where can I find this?
It is available on the public services website, DirectGov:
http://www.direct.gov.uk/en/Pensionsandretirementplanning/StatePension/AdditionalStatePension/DG_4017827?CID=PRP&PLA=url_mon&CRE=contracted_out_pensions

8. Are defined benefit schemes in anyway affected by these changes?
No. Defined benefit schemes can continue to contract-out on a salary-related basis. One planning point to consider therefore is that a transfer to a personal pension scheme would result in the value of the GMP/S9(2B) Rights becoming an ordinary fund. But a transfer to a Section 32 (S32) would need the nature of the GMP/S9(2B) Rights to be retained.

9. What about employers who may operate ‘contracted-out mixed benefit' schemes? What do they do?
For employers facing this situation no further National Insurance rebates will be payable from the 6 April 2012 for those individuals contracted-out under the DC section of the scheme. Individuals who are contracted-out under the defined benefits section are unaffected. The contracting-out certificate for the defined contribution section will be automatically cancelled and will remain valid only for the defined benefits section of the scheme. The employer will NOT be required to apply for a new contracting-out certificate.

10. What happens about individuals who have already accrued protected rights pots?
At present protected rights benefits have a complex benefit structure as they are designed to provide benefits in place of the additional state pension. The good news is that from 6 April 2012 these complexities will disappear and former protected rights benefits will be treated in exactly the same way as non-protected rights benefits. In other words the need to provide a pension for a widow(er) or surviving civil partner would disappear as would the need to use unisex annuity rates.Additionally a lump sum will always be available on death regardless of circumstances.

Andy Zanelli is head of technical sales at AXA Wealth