(Published October 2008)
Protected Rights and Self-Invested Personal Pensions (SIPPs)
Allow me to introduce you to one another...
Background
Protected Rights funds are accrued when pension investors 'contract out' of the State Second Pension (S2P) or the State Earnings Related Pension Scheme (SERPS), as it was previously known.
Put simply, individuals who 'contract out' give up their right to benefits from S2P or SERPS, in return for the Government making payments on their behalf into either their occupational or personal pension scheme.
These payments and the investment growth they produce are ring-fenced as Protected Rights funds and are subject to specific rules in respect of both their accumulation and the benefits they must provide.
What has changed?
The rules surrounding the investment of Protected Rights funds were relaxed on 1 October 2008, allowing them for the first time to be held within a Self-Invested Personal Pension (SIPP).
Why is this significant?
This development presents a great retirement planning opportunity for many thousands of people, since it is estimated that approximately £100 billion is currently invested in Protected Rights funds in the UK. (Footnote 1)
Indeed, according to Mike O'Brien, Minister for Pensions Reform:
"These changes will give more flexibility and investment choice to people taking an active interest in the management of their pension fund. It will also be easier for individuals to transfer funds between different types of pension schemes, and to consolidate pension rights in one place."
How does the legislative change affect me?
Many of those who already had a SIPP were eagerly awaiting 1 October 2008, in order that they may transfer in their Protected Rights funds and thus benefit from the investment control, flexibility and choice they already enjoyed in respect of their Non-Protected Rights pension funds.
For those who do not currently have a SIPP, the legislative change offers a chance to reassess your retirement planning strategy, particularly if you have previously contracted out through a Personal or Stakeholder pension, as Protected Rights funds invested in this way have often performed poorly and in fact, are sometimes simply forgotten about.
What is a Self-Invested Personal Pension (SIPP)?
A SIPP is a Personal Pension that allows the individual investor, rather than the pension fund manager, to make the investment decisions.
SIPP's enjoy the same tax privileges as traditional Personal Pensions, but offer much greater flexibility in respect of the income options available at retirement and the investments which are permitted to be held within them, popular examples of which are individual share portfolio's and commercial property.
Should I transfer my Protected Rights funds to a SIPP?
There are undoubtedly advantages for some people in transferring their Protected Rights funds into a SIPP, but equally, it must be recognised that such a course of action is not correct for everyone.
The following should be considered before making any decisions:
- If your Protected Rights funds are performing poorly, does your current pension plan have the scope for making the required investment changes?
- Are there any exit charges from your current Protected Rights plan or entry charges for transferring funds into a SIPP?
- Are you comfortable with the level of investment risk you are thinking of taking, if you plan to move from lower risk funds to the sort of higher risk funds which are accessible through a SIPP?
- Do you really need the functionality a SIPP offers, because the increased flexibility does come at a price, as charges within SIPP's can be higher than those in traditional pension plans, particularly for those with smaller funds.
- Should you be evaluating all of your financial plans for your later years and considering whether you are saving enough to provide the retirement you hope for?
Summary
The legislative changes of 1 October 2008 have provided an excellent opportunity to review and take control of your retirement planning, as the Government have offered you the freedom and incentive to prepare for your later years in the way that you feel is best.