The Government has been urged by SIPP provider Alliance Trust to give a timeframe for when protected rights can be included in a SIPP and remove current restrictions on spouse's pensions.
The call comes amid increasing frustration amongst IFAs and their clients who wish to consolidate all their protected rights (pension funds built up from National Insurance rebates when contracting-out of the State Second Pension) into a single self-invested pension arrangement.
The Government has announced that protected rights will be transferable to a SIPP but has not released any clear timetable for the change in regulations. Alliance Trust had originally hoped the restrictions would be lifted by 6 April when SIPPs became regulated but this has not proved to be the case.
Alliance Trust is also concerned about the requirement for protected rights to provide a spouse’s or civil partner’s pension entitlement on the individual’s death. With such a restriction in place, it is not practical to transfer protected rights to a SIPP because a separate record relating to protected rights would significantly complicate SIPP administration, the group warns.
Hyman Wolanski, head of pensions at Alliance Trust, says: “The original concept of contracting-out – namely to ensure that substitute benefits are provided in private pension arrangements that fully replicate the State Second Pension rights given up through contracting-out – has been watered down so much over the years there is now little merit in maintaining any special rules for protected rights.”
Wolanski adds: “We are well aware of the deep frustration caused to our advisers and their SIPP clients by the current restrictions on transferring protected rights to a SIPP. Alliance Trust is committed to allowing protected rights to be held within our SIPPs as soon as the Government changes its rules to allow this.”
Suffolk Life director of sales and marketing John Moret says he believes a rule change on protected rights is unlikely before Spring next year. With other legislation on contracting out not expected until 2012 however, the time table for change could be as wide as between 2008-2012, he adds.
"IFAs shouldn't be working to the earlier date. There are one or two SIPP products which accept protected rights now but that is through a life company wrapper," he says.
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Have Your Say:
"There seems to be great confusion on behalf of the government as to how pensions work for those not in the relative comfort of defined benefit schemes such as civil servants. My various money purchase schemes and PR money will provide both my wife and I a pension and I can manage it better in a SIPP to provide for both of us than buying a poor value annuity. Drawdown from a SIPP means that the capital is not lost at the start which is the case with an annuity.
If I should die before my wife the whole of the remaining fund is available for her. She can choose to continue drawdown, without much of a reduction, or buy a single life annuity with the fund. This will provide a better income for her than the alternative scenario of a 50% spouse pension on the PR fund.
It would be totally unworkable to retain a difference between ordinary pension monies and PR. Separate accounts would increase the cost to me for no benefit. And what additional restrictions would be needed in the PR account to justify its different treatment? Would there be an obsession to maintain its capital value which would prevent any investments in equities. Cash will provide an income but one which erodes capital through inflation.
Annuities are a product for those who do not want to take charge of their financial affairs and for those who choose this route I can understand why the government does not want all the PR money to be invested in a single life product with no provision for the spouse. However those that choose the SIPP route are providing a better future for their spouse.
Additionally why does the government feel that they have to provide a different set of rules once I reach 75? Am I suddenly less capable overnight or in need of less money?
The major argument I have heard from the government is that they do not want pension monies to be used to pass money on after death in a tax efficient manner. There is also a concept that the very rich will abuse the system probably in some way they have not thought about.
What a load of nonsense. First there is a lifetime cap on the amount of money that one can contribute to a pension. A cap that only certain politicians can avoid by special legislation. Second there is a minimum withdrawal amount at 75 anyway. If this is a concern perhaps there should be a minimum withdrawal on crystallisation and get rid of the post 75 differences. Third the government have already introduced a punitive taxation on final death of any capital in the fund which totally wipes out any incentive to build capital, I suspect that the faceless civil servants are the ones that are raising the red herrings and spreading FUD with the ministers and introdusing bureaucratic delays to any sensible initiatives.
The only way this can be overcome is by putting increasing pressure on politicians to show that this is nonsense and a potential grey vote loser. Keep up the pressure." John Measey, IFA
"Here are my thoughts and opinions on the PR debacle:
1. The inability to invest in straight equities and related products due to the requirement to invest PR money in "insured investments" forces investors to buy underperforming products. Many people will be better off with a lifeco product but many of us feel we could do a much better job by self-investing in a SIPP and drawing down when the time comes. These people should not be forced into poor products as is currently the situation.
2. Maintaining 2 seperate pots - one PR and one non-PR brings 2 sets of charges which will reduce the returns available and lower pension payouts.
It also complicates administration. This is to nobody's benefit.
3. The original idea of contracting out and the resulting PR money was to replicate the state 2nd pension whilst at the same time introducing the possibility of increasing payments thorugh supoerior investment performance.
However, not all PR money originates from contracting out od SERPS/SSP. For transfers out of final salary company schemes for service after 1997, transfer values are treated as PR money. In my own case I have around £60k of PR money, over half of which originates from an occupational scheme transfer. To try and impose the same rules as apply to state-funded contributions (i.e. opting out) on money that originates from the private sector is absurd - joining such schemes is entirely optional, and for that reason there was never any guarantee of a survivor's pension anyway, so why impose it?
4. The requirement for a survivor's pension is pushing at an open door - how many married people would really NOT want the survivor to benefit from their fund? For those occasional acrimonious cases, there is already a legal remedy in the form of pension-sharing arrangements.
5. In practical terms, PR funds below £100k (which will be most of them) are very hard to draw down from because most providers are not interested in them. Such products that are available are expensive and restricted to poorly performing lifeco products. What is needed is parity with non-PR money in terms of investment choice.
6. Nowehere in any of the press coverage of this stuff is there any comment about how the requirement for a survivor's pension interoperates with drawdown. On first death, the fund is retained (as opposed to being lost with an annuity) and the income continued without any reduction. So the survivor's income stream carries on automatically without any need to do anything special. So drawdown appears to already do what DWP want.
We want all this sorted out and we want it sorted out now. Some of us actually want to start drawing on these funds soon and these ludicrous rules are just getting in the way of a sensible solution. Keep up the pressure!" Nick Dobson, Investor
"Re the delay over this, I'd like to echo the comments made by the others, and in particular to complain about the discriminatory treatment the delay is causing for those who want to do income drawdown.
As you'll be aware, most PR funds are fairly small, and although drawdown from PR money has been legal for years, the lifecos refuse to accept PR funds for drawdown below 50k (and only a very few will accept at that level).
Effectively this means that almost everyone who wants to take benefits under the new A day rules from their PR fund is forced to buy an annuity.
This is totally against the spirit of the new rules, which were meant to enable people to take their tax free cash (perhaps to pay off an endowment shortfall, or tide them over until other pensions kick in after a redundancy) but leave the rest of their fund invested without taking an income until later.Instead they are forced into a poor value annuity at a very young age.
Meanwhile the SIPP providers, who are willing and able to provide low cost drawdown for small PR funds are not allowed access to the market.Where does that leave us as far as free competition is concerned?" Maggie Ford, Investor
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From 6 April 2019