Advisers need to be aware protected rights can be invested in self-invested personal pensions, but not in the trust-based variety available from most providers, claims Merchant Investors.
The company, which is part of the South African insurance company Sanlam Group, says protected rights are able to be fully invested in an insurance-based or personal managed fund (PMF) sipp.
This is a product where an insurance company ring-fences a separate fund for the client within its own life fund, which is then able to hold the Sipp investments the clients wants including commercial property, equities, and collectives subject to the permitted linking rules – which require assets to be “readily realisable” and “regularly valued”.
However, the number of providers offering PMF Sipps is very small because of the additional regulatory burdens built in, such as a solvency requirement of sufficient capital to reduce risk of insolvency to one chance in 200, compared to the proposed requirement of 13 weeks of operating costs for trust-based Sipps.
Although while the PMF structured sipp has better regulatory protection for members than a trust-based version, and has the ability to invest protected rights in all permitted investments including commercial property, Merchant Investors point out the current rules between the two types of scheme do have some “interesting” anomalies.
For example, Merchant points out, if a PMF Sipp client want to invest in a fund or asset class such as private equity or hedge funds, which aren’t allowed under the permitted lining rules, the Sipp can apply for a waiver from the Financial Services Authority (FSA), which looks at the clients attitude to risk and their investment objectives before saying yes or no.
However, if a waiver is granted it only applies to that individual, so if another client wants the same investment the process has to be repeated, which is completely different to trust-based schemes as these can hold the exactly the same assets but without the need to get permission from the FSA first.
While there are some anomalies between the two schemes, Tim Fox, head of compliance and technical at Merchant Investors, says it is important advisers are aware of the truth behind the myth suggesting protected rights cannot be invested in sipps.
Such comments follow the recent launch by Scottish Widows of its Retirement Planner pension - a sipp which also has the ability to self-invest protected rights.
Fox says: “Purely from the point of view of Treating Customers Fairly (TCF) there needs to be a much clearer message to advisers that this is allowed and into all permitted asset classes, but only with PMF schemes.”
He says “all this noise about a u-turn” following the government’s decision to include the issue of protected rights into a review of the annuity open market option (OMO) following a month-long consultation last September, is just not true.
“The government never said they would make protected rights available to trust-based schemes from April when regulation started, and if I was the government I wouldn’t want to make that kind of decision when we don’t know how many sipp providers will still be here in the next few months or years,” warns Fox.
Meanwhile, Rachel Vahey, head of pensions development at Aegon Scottish Equitable, says the issue of sipps and protected rights has been slightly down to bad timing, as from 2006, providers with sipps had a choice – to create a sub-section in the appropriate personal pension (APP) to hold the sipp or choose a PMF.
However, as the first option would mean a lot of legal work, such as changing rules and terms of the scheme, and a lot of administration work, including transferring the money over from the current scheme into the APP sub-section, few providers have done this.
She says Aegon would ideally like the rules to change for protected rights to allow full self-investment, so schemes can offer a solution “in a more complete and simpler way” than the current two options.
Vahey says: “The government has looked at this issue several times, and we really thought they would make a decision, but unfortunately, so far this has been put on hold. At the moment, PMFs aren't part of our strategy for sipps, as we would rather find a solution for protected rights and sipps through a change in legislation.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7034 2681 or email [email protected]IFAonline
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