Should I put my protected rights into a SIPP?
The changes, which were confirmed by the government at the end of June and came into play on 1 October 2008, will for the first time allow investors to transfer their funds of protected rights into self-invested personal pensions (SIPPs).
Protected rights funds are made up of national insurance contributions from taxpayers who have decided to opt out of the State Second Pension.
These payments, and any subsequent growth they enjoy, have always had to adhere to rules that prevented them from being subject to the risks associated with self-investment - understandable as the area was previously lightly regulated.
Back in 2005, the government considered whether to permit SIPPs to hold protected rights, but decided that a tighter regulatory framework needed to be in place so consumers would have suitable protection.
The final piece of the jigsaw slotted into place in April 2007 when the Financial Services Authority implemented a new regime that introduced consistent protection for consumers across all types of personal pensions, including SIPPs.
Holding pension assets in a SIPP - which can accommodate a wide range of investments including shares, gilts, unit trusts, investment trusts, insurance company funds and even commercial property - enables individuals to either make decisions associated with their overall investment portfolio themselves or use a financial adviser or stockbroker to implement the changes on their behalf.
According to Mike O’Brien, the minister for pensions reform, allowing protected rights into SIPPs will dramatically increase the choices on offer for those who want to take an active interest in the management of their retirement money.
"It will also be easier for individuals to transfer funds between different types of pension schemes, and to consolidate pension rights in one place," he added.
Rachel Vahey, AEGON’s head of pensions development, agrees that it’s a significant development. "This is a big step forward in making pensions clearer for everyone and will make it easier for people to consolidate funds - if this is the best option for them," she said. "Allowing the self-investment of protected rights removes an anomaly that did more to confuse people than help them plan for retirement."
As far as SIPP providers are concerned, this move represents a huge amount of potential new business. As a result, competition to win the business of customers with money to invest is likely to be fierce over the coming months.
Andrew Tully, senior pensions technical manager for Standard Life, estimates there is between £75 billion and £100 billion of protected rights funds held in defined contribution pension schemes that people might want to consolidate in a SIPP.
"This is often money which people have forgotten about and, therefore, is a great opportunity to make this money work as hard as possible for retirement while making investment decisions easier," he said. "People can monitor progress of their retirement plans using their SIPP alone and will make life easier by reducing paperwork, while maximising the investment potential across their portfolios."
There has been a lot of interest in this area from consumers. Tom McPhail, head of pensions at Hargreaves Lansdown, a direct SIPP provider, said that thousands of investors had requested information about what was on offer - while a substantial number of transfer applications had also been received.
"The key benefits are simplicity, control and investment freedom," he added. "The fewer investment contracts you have to keep track of, the simpler your life and the easier it is to plan and manage your retirement funding."
More investment options
According to McPhail, having all your retirement money in one place means being able to run one investment strategy based on one set of fund and share choices. Investing via a SIPP, meanwhile, provides many more investment options.
And now could be just the time to give it a look.
"There is a natural inclination to take less interest in your investments when they are falling in value because it is much more fun when they are going up every day," he said. "However, it is much more important to take an interest in where your money is invested when the markets are uncertain because it can help you to minimise your losses, and just as importantly, position yourself to make the most of the market recovery when it does feed through."
Consolidating pension assets will definitely be a key benefit of the new regime, agrees Steve Latto, pensions development manager at Alliance Trust Savings. "Many individuals have a variety of pension arrangements that they have gathered over their working lives and these changes will make it easier for them to consolidate and manage their pension investments within a single pension product," he said.
But not everyone is brimming with optimism about the changes. Ian Naismith, head of pensions market development at Scottish Widows, agrees with the idea in principle, but is worried how it will work in practice.
"We are concerned that many people could be advised to transfer their protected rights into a SIPP without realising the effect of charges under their new arrangement, which could well be higher than for their existing personal or stakeholder pension," he said.
"We believe strongly that all transfers into SIPPs should be accompanied by full disclosure showing the possible pension at retirement and the effect of charges."
Andy Gadd, head of research at Lighthouse Group, also believes that investors who are considering moving their protected rights into a SIPP should take the costs involved into account.
"Many investors may be better off leaving their arrangements as they are, rather than transferring to a SIPP because the existing fund choice available meets their needs and offers better value for money," he said.
It also means a lot of responsibility will fall on the shoulders of IFAs.
"Advisers will need to ensure that anybody advised to switch their protected rights into a SIPP are doing so for the right reasons and customers are treated fairly," Gadd added.
So, just because you can transfer your protected rights fund into your SIPP doesn’t automatically mean that you should, says Martin Bamford, chartered financial planner at Informed Choice IFA.
"The marketing of this option has already begun and it will be easy to be seduced by the messages about control and greater investment choice," he said. "While these are attractive points, transferring to a SIPP is not the right choice for everyone."
Bamford suggests people review their existing pension arrangements and establish their long-term investment goals. If they do decide to go ahead, then they should scour the market for the most attractive SIPP options and check all the costs involved.
"These are all important factors to consider ahead of a decision to transfer your protected rights fund into a SIPP," he said.
"Think about each of them carefully before making a decision to transfer."
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 form of money purchase defined contribution pension launched by the then Labour government in April 2001 with low charges and no-frills minimum standards. Designed to appeal to people on low and middle incomes who wanted to save for retirement but for whom existing pension arrangements were either too expensive or unsuitable, the stakeholder didn’t really take off and looks to be superceded by the National Employee Savings Trust (NEST).
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.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.
Defined contribution pension
Often referred to as a “money purchase” scheme, although offered by employers (who may pay a contribution) these pensions are more likely to be free-standing schemes that a person contributes to regardless of where they are employed. Here, the level of benefit is solely dependent on the accumulated value of the contributions and their performance as investments. Therefore, the scheme member is shouldering the risk of their pension, as the scheme will only pay a pension based on the contributions and investment performance. The final pension (minus an optional 25% that can be taken as tax-free cash) is then commonly used to purchase an annuity that would provide an income for life.