Investors are set to gain greater control over their pensions, as the government this week confirmed that, from October, ‘protected rights’ money from contracting out of state pensions can be invested alongside other funds in a self-invested personal pension (Sipp).
This change could see up to £100bn of protected rights money currently sitting in underperforming life insurers’ funds or cash switched into the greater range of investments offered through a Sipp – such as hedge funds and structured products.
The restrictions on protected rights were put in place because the government believed that rights intended to replace state benefits should not be subject to the same risk as self-invested pension money. But since all personal pensions have been regulated by the FSA since April 2007, it now thinks this is unnecessary.
Companies offering Sipps are now in the process of adjusting their products so they can hold both protected and non-protected rights money from October.
Some, however, can already allow protected rights to be invested alongside non-protected rights in a Sipp, so the option is already there for investors who know how to take advantage of it. They do this by holding the protected rights element separately, on an insurance- based contract, while the non-protected rights are held on a trustee-based contract.
The three providers that are offering this option are Merchant Investors, Scottish Widows and Suffolk Life.
Protected rights can also be held on the Nucleus wrap platform, through its Sipp.
None of these options is available to direct investors, so the October rules will be welcome for those looking to self-invest their protected rights without the help of a financial adviser.
Tom McPhail at Hargreaves Lansdown says the company has already been contacted by several thousand of its Sipp clients who asked to be notified as soon as the facility was available, following the government’s initial announcement in January.
Certain restrictions still apply to existing protected rights plans, and these will also be removed in October, when protected rights can be held on a trustee-based contract. At present, because they are held on an insurance-based contract, they are subject to the ‘permitted links regulation’, which restricts where they can be invested. For example, they cannot be invested in more complex instruments such as hedge funds or structured products.
As a result, opinion is divided over whether people should pick one of the existing products to invest their protected rights now, or wait until October when there will be more choice – in terms of providers, and in terms of where the protected rights can be invested. The decision may rest on what sort of Sipp is best for the investor.
Amanda Davidson, director at IFA firm Baigrie Davies, says: “The bigger picture is what to do with non- protected rights rather than protected rights. Otherwise, it’s the tax tail wagging the investment dog.”
If the available options now are suitable overall for your Sipp, says Davidson, there is no reason to delay. But those with another provider are likely to be better off waiting until October.
One reason for this is that protected rights portions of a pension savings tend to be considerably smaller than their non-protected savings. Hargreaves Lansdown estimates that the average value of protected rights is £16,500.
But Suffolk Life, which is aimed at the higher end of the market, says that since launching its protected rights option in October, around 40 per cent of its new Sipps hold protected rights, with an average value of £50,000.
John Moret at Suffolk Life warns: “Because of the way ‘protected rights’ is defined, for anyone transferring from a final-salary scheme, all their benefits accrued since April 1997 are deemed to be protected rights. This can lead to substantial protected rights funds often into six or even seven figures.”
But some have argued the fees on these Sipps tend to be at the high end of the range. Suffolk Life charges an annual fee of £475 on the non-protected rights side and £240 on the protected rights side, making an annual charge of £720 for using the Sipp wrapper alone – not to mention the additional charges that will apply on the funds selected.
Still, Davidson believes £240 a year is not excessive, particularly on high-end Sipps designed for larger pension pots. Also, she adds, when greater numbers of people enter the market, the competition is likely to bring prices down. Moret also points out that the fees are flat, so as the pot of funds increase, the cost becomes more negligible.
