Protected Rights Technical Update

09-03-2009

 

The DWP have confirmed in discussions with The Association of Member-Directed Pension Schemes that, where protected rights and non protected rights are held under the same policy, the protected rights (PR) fund cannot be depleted in preference to the non protected rights (NPR) fund.

This means that where a phased retirement stategy is followed the crystallisation must be made proportionately across the PR and NPR or preferentially from the NPR.

The DWP’s requirements extend to income withdrawals. You cannot for example elect for nil income from the crystallised NPR and maximum income from the crystallised PR since this would be seen as preferential depletion of the protected rights fund.

One critical implication of the DWP’s requirement could occur on transfer of a crystallised PR fund into the same policy as an uncrytallised NPR fund since this would result in an enforced crysallisation of the NPR in order to comply with the DWP requirement. We therefore urge caution if transferring crystallised PR funds into another arrangement.

These restrictions will of course be removed in 2012 when defined contribution contracting out will cease. In the meantime the DWP are adamant that their requirements must be met. Unless otherwise instructed Westerby Trustee Services will therefore be allocating phased retirements proportionately across the PR and NPR funds.