Taxbriefs Commentary Library

Goodbye defined contribution contracting out

John Housden, 02 May 2012


 

Defined contribution (DC) contracting out ended on 6 April 2012, but not all the consequences are well understood.

Protected rights (PR) are no more. This has a variety of implications, including:

Death benefits For deaths on or after 6 April 2012, there is no requirement to provide survivor’s benefits in the form of a pension: a former PR fund can be paid as a lump sum. Earlier deaths are still subject to the PR rules, even if benefits are not settled until after 5 April 2012. The situation regarding nominations and defaults for PR death benefits is less clear cut: HMRC say schemes should seek their own legal advice.

Pension commencement lump sum It is now possible to draw cash from former PR funds, but for the purposes of pre-A Day protected cash calculations, PR funds continue to be ignored.

Serious ill health lump sum (SIHLS) Before 6 April 2012, if a married scheme member took a SIHLS, 50% of the PR fund had to be retained by the scheme to provide for a survivor’s pension. HMRC says that any such retained lump sum within an arrangement can now be paid as a SIHLS, provided the member still meets the SIHLS conditions and payment of the lump sum extinguishes all of a member’s entitlement under the arrangement.

Short service refund (SSR) Before 6 April 2012, leavers who took SSRs had all their PR retained in the scheme. In theory, a new leaver can now draw an SSR, which includes their former PR, to the extent that they represent member contributions. In practice, however, the scheme documentation may prevent this happening until it is updated to cover the demise of PR. In such circumstances, no payment should be made for now because it would breach the requirement that the SSR extinguishes a member’s entitlements.

Bankruptcy The protection given to PR in bankruptcy by the Insolvency Act 1986 is no more, because PR are no longer identifiable.

The demise of DC contracting out is generally welcome, but some of the effects are not widely appreciated.

This article first appeared in the April edition of Financial Timesaver – the monthly newsletter for the busy financial adviser.

 


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John Housden

Editorial Consultant

John Housden is a qualified actuary who has worked in the personal financial services industry for 40 years.

A former technical director for a life company and longstanding contributor to a wide variety of Taxbriefs publications.

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