MPs confirm changes to SIPP rules
The government has confirmed changes to pension rules that will allow investors to transfer protected rights into Self Invested Personal Pensions (SIPPs) from October.
Protected rights funds are accrued when investors are contracted out of the state second pension. In simple terms, investors give up the right for a lower state pension, and their National Insurance payments are rebated into their pension scheme. These payments, and the growth on them, are fenced off as Protected Rights.
Currently, people are prohibited from transfering their pots of protected rights into a SIPP. However, at the end of last week Mike O'Brien, minister for pensions reform, confirmed that this rule will be scrapped from October.
He said: “These changes will give more flexibility and investment choice to people taking an active interest in the management of their pension fund.”
Experts have largely welcomed the change. Independent financial adviser Hargreaves Lansdown says the change represents a £100 billion opportunity for investors, and will affect around six million people who have average protected rights funds of £16,500.
Tom McPhail, head of pensions research at Hargreaves Lansdown, says SIPPs is one of the few sectors of the pensions market experiencing growth. “This development is likely to accelerate demand, as investors will be able to take control of all their retirement savings in one place,” he adds.
The SIPPs market increased by 66% over the past year, from £29 billion to £49 billion.
Jamie Fergusson, fund manager of SIPPs at Jupiter Asset Management, says the old rules restricted pension investors and “served the interests of some pension providers more than those of pension investors”.
“We have a number of clients who have opted for a SIPP as a means to manage all of their pensions as a single structured investment portfolio and who consider it an irritation that their protected rights pension had to be invested and reported on separately,” he says.
“We expect many people in this position will want to take advantage of this change and complete the consolidation of their pension portfolios.”
A SIPP is a personal pension that allows the investor to make the investment decisions rather than a pension fund manager. The tax status of a SIPP is identical to a conventional personal pension and, in retirement, an income can be taken through an annuity or income drawdown.
Income from assets in the scheme will remain untaxed and growth within the pension is free from capital gains tax.
Should I transfer my protected rights to a SIPP?
Hargreaves Lansdown says that if investors are stuck in a poorly performing insurance company fund, especially one that only offers a limited range of investment choices, then a low cost SIPP might offer them the opportunity to revitalise their pension.
However, it also advises that if your money is in a personal pension that offers a good range of investment funds and you only have a small amount of funds, then it may not be in your best interests to switch to a SIPP.
Tom McPhail says: “One thing for sure is that interest in transferring is already gathering momentum. Even though we are still six months away from regulations coming into force, Hargreaves Lansdown has already received requests from over 1,500 existing clients who wish to be notified when transferring protected rights to a SIPP becomes possible.”
In terms of returns, McPhail says that the greater choice of funds within a SIPP means there is more scope for picking a good fund. And if your first choice doesn’t meet your expectations, then you’ll have a better choice of alternatives.
“Generally, the unit trusts and OEICs available in SIPPs tend to outperform traditional pensions - over five, 10 and 15 years the average unit trust/OEIC has outperformed the average pension fund by 12%, 22% and 69% respectively,” he adds.
The cost of a SIPP can also be lower than a personal pension, according to financial planner Francis Klonowski, of Klonowski & Co: “SIPP fees tend to be fixed so - as long as your fund is a reasonable size - they are normally lower cost than most personal pensions.”
Before opting to transfer any pension funds into a SIPP, you should consider whether the amount you have to invest makes it worth it. Matt Pitcher, wealth adviser at Towry Law, says that as some stakeholder pensions offer good ranges of investment choices, it is vital that people consider the pros and the cons of a SIPP.
"If you are only investing £20,000 or so, then a SIPP is an expensive way to save for retirement, but if you have £100,000 plus then they tend to a cheaper option," he says. "And remember, if you also want to appoint a manager to manage your SIPP then this becomes more expensive.”
The time demands of managing your own pension should not be overlooked; Pitcher recommends investors look at their funds on a daily basis. And, while there is a wealth of experience available on the internet, a pension investor is unlikely to ever have access to the information and experience that a fund manager has.
Pitcher adds: “SIPPs are not for everyone, and although protected rights can be a reasonable sum, there is hard to justify transferring these alone into a SIPP as the fees might not make this economical. Self-investing your own pension is very demanding and time consuming and should not be entered into lightly.”
All investment returns are measured against a benchmark to represent “the market” and an investment that performs better than the benchmark is said to have outperformed the market. An active managed fund will seek to outperform a relevant index through superior selection of investments (unlike a tracker fund which can never outperform the market). Outperform is also an investment analyst’s recommendation, meaning that a specific share is expected to perform better than its peers in the market.
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
A collective investment vehicle (known in the US as a “mutual” or “pooled” fund) and similar to an Oeic and investment trust in that it manages financial securities on behalf of small investors who, by investing, pool their resources giving combined benefits of diversification and economies of scale. Investors buy “units” in the fund that have a proportional exposure to all the assets in the fund, and are bought and sold from the fund manager. The price of units is determined by the value of the assets in the fund and will rise or fall in line with the value of those assets. Like Oeics (but unlike investment trusts) unit trusts and are “open ended” funds, meaning that the size of each fund can vary according to supply and demand of the units form investors. Unit trusts have two prices; the higher “offer” price you pay to invest and the “bid” price, which is the lower price you receive when you sell. The difference between the two prices is commonly known as the bid/offer spread.
Open-ended investment companies are hybrid investment funds that have some of the features of an investment trust and some of a unit trust. Like an investment trust, an Oeic issues shares but, unlike an investment trust which has a fixed number of shares in issue, like a unit trust, the fund manager of an Oeic can create and redeem (buy back and cancel) shares subject to demand, so new shares are created for investors who want to buy and the Oeic buys back shares from investors who want to sell. Also, Oeic pricing is easier to understand than unit trusts as Oeics only have one price to buy or sell (unit trusts have one price to buy the unit and another lower price when selling it back to the fund).
An alternative to an annuity, income drawdown (also known as an unsecured pension) allows you to take income from your pension fund while the fund remains invested and so continues to benefit from any fund growth. The drawdown of income has to be calculated carefully as taking too much income could exhaust the pension fund so experts say the annual drawdown must not exceed what the assets would normally yield in an average year. The invested pension fund could also be hit by market turbulence and the value of the assets could fall.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.