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DWP set to back tax-free cash for protected rights

The Department for Work and Pensions is set to confirm that people can take 25 per cent of their protected rights as tax-free cash in the next few weeks.

The move will clear up confusion over whether tax-free cash rights will be granted on protected rights and could make contracting out more attractive.

Scottish Equitable pensions development director Stewart Ritchie says this could be an incentive to contract out with speculation that the Government is set to bolster National Insurance rebates. Ritchie stresses that the merits of contracting out are dependent on the rate of tax paid at retirement and whether the investor trusts the Government to meet state benefit promises or whether they would be better off with the cash to invest in the market to deliver returns better than a state pension.

Hargreaves Lansdown head of pensions research Tom McPhail says tax-free cash on protected rights gives more weight to contracting out but making a decision is still risky. He says: “The 25 per cent tax-free cash has to increase the appeal of contracting out but it is a judgement call with no right answer and this is just one element in a very complex equation.”

Ritchie says: “I have every confidence we will see regulations in the next few weeks which will trigger access to tax-free cash as part of protected rights from A-Day.

“Contracting out is so marginal on the numbers it comes down to trust. Do you trust the state more or less than private provision? The real thing is that the Government does need to improve rebates.”

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