Protected rights cannot be used for flexible drawdown until 2012
Savers will be prevented from cashing in protected rights pension entitlements using flexible drawdown until April 2012 under the terms of the Finance Bill.
Protected rights are pension funds built up from contributions paid by the Government when an employee contracts out of the state second pension or Serps into a money-purchase scheme.
Standard Life head of pensions policy John Lawson (pictured) says the Government’s position is that, up until 2012, protected rights must be used to buy retirement income. However, policymakers will remove the differences between protected and non-protected rights from 2012 onwards, allowing savers to cash in their entire protected rights pot.
Lawson says: “The Government has got this position that protected rights must be used to provide income. It is going to lose that philosophy in 2012 and it will remove all the differences between protected rights and non-protected rights. Protected rights will cease to exist as a concept.”
Government draft rules also stipulate that in order to take protected rights as a tax-free lump sum, investors will have to cash in the same proportion of their non-protected rights. This is to prevent people taking all of their tax-free cash out of their protected rights pot.
The new flexible and capped drawdown regime will be introduced this April, although most providers says they will not have a flexible drawdown offering available by then.
The Retirement Adviser director Nick Flynn says the Government has historically been “overprotective” of protected rights.
He says: “Protected rights have always been deemed as not really your money by the Government, which is a bit of a joke. It has always been overprotec- tive of it and clients are hugely confused by the rules surrounding it.”
From April 6, 2012, protected rights will become ordinary scheme benefits, which was legislated for in the 2007 and 2008 Pensions Acts.
A DWP spokeswoman says: “It is not a standalone policy but part of the rolling programme of improving pension provision for the future.”