Both the employed and self-employed can build up entitlement to the Basic State Pension, which is funded by your National Insurance contributions.
However, employed individuals can also benefit from an additional “top up” state pension. Since 2002 this has been called the State Second Pension (S2P). Prior to 2002 this was referred to as the State Earnings-Related Pension Scheme (SERPS).
Contracted out Pensions (Referred to as Protected Rights funds)
Instead of the Government building up your entitlement to the second state pension it is possible to “Contract out”. Thereafter you will receive annual rebates from the Government, directly into your own Personal Pension.
Within your pension these ‘contracted out’ funds are referred to as Protected Rights funds.
The option to contract out is expected to end in 2012, however as it has been available since 1988, many individuals have built up significant Protected Rights funds.
Please note neither SERPs nor S2P have been available to the self employed.
Using a SIPP to contract out
Since October 2008 it has also been possible to utilise your built up Protected Rights funds within a SIPP. Therefore you can invest these funds to gain investment flexibility on your Protected Rights funds.
We are often asked whether it is best to continue Contracting Out, ultimately it is personal decision that cannot be accurately advised upon and as such our stance remains neutral on the area.
To help gain a personal insight there are some useful links we suggest. In particular, the Pensions Advisory Service has recently added an on-line ‘Contracting Out Planner’ to its website to help with the decision as to whether to opt out, or contract back in: http://www.pensionsadvisoryservice.org.uk/tkflow/Flow.aspx?f=TPASContractingOut&template=TPAS_Template_new&xsl=dtree_new
There is also the FSA’s guide to contacting out, this can be accessed via the FSA website: http://www.moneymadeclear.fsa.gov.uk/tools/publications/publications/html
The Boolers Focus SIPP can accept transfers in of Protected Right funds,
however ongoing “contracting out” rebates can not be received.
