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.”