Sipps and Protected Rights
I’m still in catch-up mode with all the stuff that hit just before Christmas, so forgive me for only now turning to this issue of Self-Invested Personal Pensions (Sipps) and the thorny subject of Protected Rights. The thing is I’m only a normal person, as far as I know anyway, and normal people take time out every now and then. So I’m a bit behind that’s all. It’s not the end of the world. At least I hope it’s not, I mean I’d never take a holiday again if I really thought it would trigger off Ragnarok or something, honest. I mean, blimey!
Still, getting on with the pension thing, ‘Protected Rights’ is a term used to describe the funds built up in a Personal Pension (or other money-purchase) scheme from rebates of National Insurance Contributions paid to people who forego the retirement and death benefits that would arise from membership of the State Second Pension (S2P, or Serps as was) through contracting-out. Basically if you contract-out of the State Second Pension you get payments (rebates) from government paid into your private pension instead. You are giving up a guaranteed state pension for a pile of money that you can invest to grow (hopefully) into a bigger pile of money that you’ll eventually trade in for retirement or death benefits at some time in the future. It’s largely a question of preference; state guarantees versus personal ownership and control. That kind of thing.
There are other considerations with contracting-out that I won’t go into here, such as the adequacy or otherwise of the rebate levels dished out and the nature of government guarantees now that retrospective changes have been applied to accrued state second pension benefits, but that’s for another BeeLine. For this one I want to keep things at a different level; make a different point.
Contracting-out is, as I just said, all about personal ownership and choice, but the government people have never really bought into that. They’ve found it hard to let go and trust people with their own money. There is a good reason for that, of course. People who behave recklessly with the pension pots funded by government rebates could end up losing out badly and eventually turn up at the government’s door when they’re older and wiser looking for handouts because they’ve blown their pensions. Because of this, there have always been restrictions on what people with Personal Pensions can do with the funds built up from contracted-out rebates. I don’t know for sure, but I suppose this is why they were called Protected Rights in the first place. It has to be something like that because a pile of money doesn’t really confer any ‘rights’ and even if it did they wouldn’t be ‘protected’. It seems to me that the protection that is conferred is protection against ourselves and our unproven tendency to take uneconomic risks with our money. Anyway, however the name came about, the thing is the way you invest your Protected Rights fund and the form of benefits you can purchase with it in your dotage has always been tightly controlled by legislation. You can have control of your rebate money, but only so much. That’s the deal.
What this has meant in practice is that Personal Pension schemes have had to be subdivided into two bits for people who use them both to pay personal pension savings into and also to house their annual rebates from government. Kind of two Personal Pensions in one really, two separate piles of money with different rights applying to how you can spend them. For that special form of Personal Pension, the Self-Invested Personal Pension (Sipp), this ‘all under one roof’ approach has only been possible if they are happy to accept that the Protected Rights fund is invested in a separate insured product that is subject to additional regulatory provisions from the Financial Services Authority (FSA) because of the current lack of a uniform regulatory framework for all Personal Pensions and Stakeholder Pensions (another different form of Personal Pension). All that really goes against the whole idea of what a Sipp is all about and in practice this has meant that many of the Sipp products in the marketplace don’t bother with Protected Rights. This in turn has led to many people ending up with two entirely separate Personal Pensions at once; a self-invested one and a bog-standard Personal Pension too for their Protected Rights. That, of course, is inefficient and causes all sorts of palaver what with advice and everything.
The barriers, though, are beginning to break down. The changes already coming in on 6th April this year as a result of the 2004 Pensions Act will allow people to draw benefits from their Protected Rights funds from age 50 rather than having to wait until they reach age 60 and, at last, people will be able to surrender one quarter of their Protected Rights funds in return for tax-free cash sums. This is all very welcome and goes a long way towards making Protected Rights funds a lot more like normal Personal Pension funds. There are still some restrictions hanging on in there, like the need to buy a unisex annuity (a complete nonsense in my opinion) and the need to buy a contingent pension for a spouse if you’re married, even if you don’t need or want it (even more nonsensical), but we’re at least starting to come out of the Dark Ages a bit.
With Sipps, many of us had been hoping that the government guys would ease off on the reins a bit more and allow people with this form of Personal Pension some more freedom over their investment. For people who have been contracted-out of the state second pension arrangements since 1978 the Protected Rights funds accrued to date can easily be around the £50,000 level, so it’s a sizeable amount of money that many regard as being tied up in what for them are unsuitable investments.
The Government has been consulting on this aspect of pensions (and even if you didn’t know that I bet you’re not surprised to hear it – I mean what aspect of pensions aren’t they consulting on? Don’t start me off again…)… ah, now I’ve lost my thread. Oh yeah, they’ve been consulting on all this and just before Christmas (timing is everything isn’t it?) they put out their response to that consultation in the form of ‘The Personal Pension Schemes (Appropriate Schemes) (Amendment) Regulations 2005 – Government response to consultation’. Given the pretentiousness of the daunting title, the document is a surprisingly easy read. Mind you, that’s partly because it doesn’t actually say that much, but you can’t have everything I suppose.
What it does say is that they are happy for Sipps to hold Protected Rights funds from April 2006 and the Government will back down from its proposal of a blanket ban preventing all Sipp schemes from holding Protected Rights. Not much to give away really, but the precedent’s there now and some unnecessary administrative costs may be able to be avoided for some people. The bottom line, though, is that Protected Rights held in Sipps will still have investment restrictions. The good news is that the regulatory framework for private pension providers is already under review (yet another consultation, started this time in September 2005). We’ll need to wait until the dust has settled on that before we find out just how far the Government is prepared to go in freeing up Sipps and Protected Rights.
The Government’s preferred option will be to introduce a new regulated activity specifically relating to Personal Pension schemes, so that the operation of all Personal Pension schemes (including Sipps) would come within the scope of the Financial Services Authority (FSA). That will most likely be from 6th April 2007 and, basically, the Government is saying here that it will look at it all again once the new regulatory regime is in place. I don’t know whether that’s a good thing or a bad thing, but I suppose it’s something. We’ll just have to wait a year or so to see what.
12 January 2006
DWP - Pensions: Contracted-out Benefits and Miscellaneous Amendments, Consultation on Draft Regulations, March 2005 and Government response to the consultation, December 2005.
HM Treasury - Proposed changes to the eligibility rules for establishing a pension scheme, A consultation document, September 2005 and Consultation Update, 5 December 2005.
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