About protected rights
In 1988, it became possible for individuals to opt out of the government's additional pension, or SERPS, scheme.
This opt out is now known as Protected Rights. Protected Rights are a type of pension fund. The pension fund is built up by money coming in from the government for those of you who, have been in the past or still are, "contracted out" of the State Second Pension, now commonly known as S2P.
So instead of the government taking all of your National Insurance contributions and crediting you with a SERPS or S2P pension in addition to the Basic State Pension for your retirement, you get to redirect that part of your National Insurance contribution back to your own private pension, and invest it in your own pension plan.
Typically that would be either into your company pension scheme or your own Personal Pension (also known as a PP). So you're actually taking control of your own destiny instead of relying on the government's promise of a pension when you retire.
Up until the 1st October 2008 you could only invest your money in a limited number of funds provided by the pension companies. It wasn't possible to invest your Protected Rights funds in certain investments that can be accessed through Self Invested Personal Pensions or SIPPs. Now, you can.
This money is now free to be invested in the full range of SIPP options available, making it easier to manage your investment strategy.
Tax free cash is the main one. When you receive your additional pension from the government when you retire, it comes as a pension only. With a Personal Pension, when you "retire" (you don't actually have to stop working to do this), you can take 25% of the fund value as tax free cash. Yes, that's right, tax free!
How can I find out if I've got any funds contracted out already?
It should be relatively straight forward to find out if you've already got any funds contracted out. The best way to find out is to speak to an IFA who'll check this out for you. Just make sure you have you National Insurance number to hand.
But please remember that these are investments, and as with any other, they can reduce in value as well as increase, so good advice is vital when it comes to Protected Rights.
Contracting out won't last forever.
Contracting out is to be withdrawn by the Government in 2012. This means that you can continue to contract out of the State's Second Pension, or S2P, until then. Even if you have already gone back into the State scheme, you could still begin a pension fund with Protected Rights that you can contribute to until 2012. Protected Rights can be complicated, so to be sure about them you should speak to a financial adviser.