BY DAVID HILL
In six weeks’ time the whole “contracting out” part of the pension system will come to an end and protected rights pensions will become ordinary rights pensions.
Most private sector employees will be affected by these changes as many employees contracted out in the late 1980s, typically into pension schemes with Prudential, Pearl and other insurance companies that ran direct sales forces.
This will mean that on death before retirement, the whole of a protected rights fund will be able to be paid free of inheritance tax and if asset preservation trusts are used, the proceeds can be sheltered from inheritance tax for several generations.
This also means that when buying an annuity, individuals who are married or in a civil partnership will now be able to buy a single-life annuity if they so wish – it will no longer be compulsory to have to buy a 50 per cent joint-life annuity with a protected rights fund. It will be possible to use only part of a protected rights fund to buy an annuity (currently, phasing annuity purchase with a protected rights fund is not permitted).
It will soon also be possible to attach a 10-year guarantee period to protected rights annuities (compared to a maximum of five years currently). This is a hugely beneficial change, as 10-year guarantees cost very little to apply to pension pots and they help to ensure value for money for the family in the event of early death.
Unisex rates will also cease to apply from April 6. This means that males buying an annuity prior to age 65 who are penalised by the fact that lower female annuity rates are currently applied to protected rights funds will also benefit from the higher (male) annuity rates if they defer their purchase until after this date.
It is also worth being reminded that if you have a pension scheme that isn’t linked to final salary then you will have the option to buy an annuity on the open market. Sadly, 40 per cent of people retiring still fail to take advantage of this option and take the pension that their existing company offers them without talking to a financial planner first. From our own experience, we have seen many cases in the last few months where the open market option has increased the pension income by up to 20 per cent and even small medical conditions like raised blood pressure or cholesterol can make a significant difference to the level of pension income.
So, if you are approaching retirement it is vital that appropriate specialist pensions advice is taken from your financial planner to ensure that you take advantage of these new rules.
David Hill is a chartered financial planner and independent investment adviser at Hills Financial Planning, 15 Agnew Street, Larne. He can be contacted on 028 28276814, email firstname.lastname@example.org or see www.hillsfinancialplanning.co.uk