First Actuarial has called on the Department for Work and Pensions to press ahead with proposals to remove the constraints surrounding protected rights.
The DWP has issued a 25-page consultation, which closes on 13 October, over whether the special conditions relating to protected rights, the money built up from national insurance rebates through contracting out of the state second pension (S2P), should be removed or just lessened.
It says it is looking to treat protected rights in the same way as other pension benefits, as part of its ‘rolling deregulatory review’ of pensions legislation, as contracting out of defined contribution (DC) schemes will be abolished by 2012, and having two sets of monies within one account simply increases the administrative burden.
First Actuarial have now supported the idea of removing the constraints and also urges the DWP to press ahead with its plans to abolish DC contracting-out as it would offer better value for money for members while also simplifying pensions administration.
Alan Smith, director of First Actuarial, says the current level of national insurance rebates on offer to contracted out DC arrangements have been set below the level recommended by the government actuary department (GAD), and so do not represent a fair exchange for the state second pension (S2P) benefits being given up.
He adds: “Put simply, individuals contracted out in this way can expect to be worse off than if they had been contracted in. Removing this ‘choice to be poor’ must therefore be good news for the vast majority of people.”
And he says treating protected rights the same as other benefits which have been built up would make things easier as currently they have to be used to buy pensions with unisex rates, and where a member is married or in a civil partnership there needs to be a survivor’s benefit.
However the issue of a survivor’s benefit is one reason why the DWP has issued the consultation on protected rights as it is unsure whether this would mean people losing a valuable benefit, and uses the example of a married individual choosing a single life pension instead of one with a survivor pension attached, which would leave their partner worse off if the member dies first.
Smith argues this would be the correct choice for many individuals, as a survivor’s pension would not be needed if their partner already has their own pension arrangements, or if they are seriously ill and most likely to die before the member.
He adds: “There is no reason to retain the constraints because an individual in this position is exercising choice and there are many circumstances where this is the best choice to make.”
“Let’s hope the DWP makes a bold decision and sweeps away the constraints to strike a much needed blow fro pension simplification and choices,” says Smith.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected]IFAonline
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