Protected Rights Pension Benefits

For Use By Financial Advisors Only

This note is for general guidance only and is based on our understanding of the historic position of Protected Rights. Specific advice should be sought in respect of each individual case as required.

Protected Rights Background

Protected Rights pension benefits were the accumulated fund that resulted from an individual contracting out of the State Second Pension (and prior to that, SERPS). Historically, Protected Rights could be transferred into a SIPP provided it had registered as an Appropriate Personal
Pension.

From 6th April 2012 Protected Rights schemes were broadly abolished, and the additional restrictions that used to accompany funds accrued on that basis were removed.

Protected Rights Summary

  • Protected Rights could be included as part of a SIPP, whether that SIPP was an individual arrangement, or a group SIPP, provided it was registered with HMRC as an APP.
  • Protected Rights could be used for the full range of investments allowable within the SIPP, and could also be included in borrowing calculations.
  • There was a requirement that Protected Rights always be tracked separately to the rest of the SIPP fund.
  • Pension drawdown was possible for Protected Rights benefits, but the drawing of those benefits had to be in proportion to non Protected Rights benefits.
  • Death benefits for Protected Rights had to allow for provision of a spouse’s or partner’s pension, and there were a number of additional restrictions.

Investment Flexibility

Protected Rights could be used for the full range of SIPP investments from 1 October 2008. This included property transactions, and the funds could also be used in borrowing calculations. There was a requirement to track the value of Protected Rights as separate from the main fund. This could be done either by adopting a separate investment strategy, or by calculating the value based on notional allocation.

Retirement

Protected Rights had similar flexibility to non-protected rights, but there were some key differences:

  • If an annuity was purchased, all of the Protected Rights funds had to be used.
  • If income withdrawal was taken, then the Protected Rights fund could not be eroded at a greater rate than the non-Protected Rights fund.

In practice this meant that where, for example, a fund held both types of fund, an individual had to crystallise the same proportion of their non-Protected Rights fund as their Protected Rights. In addition, they could not elect to draw nil income from the non-Protected Rights fund if they were drawing an income from the Protected Rights fund. 

Death Benefits

Protected Rights benefits had to be used to provide benefits in the following way: – a spouse’s or partner’s pension where one exists; but if not,

  • payment of a lump sum to a nominated beneficiary;
  • or, if a nomination hasn’t been made, 
  • payment of a lump sum to the individual’s estate.

This was a prescribed route for payment, with no discretion afforded to Trustees.

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