The Government has dropped plans to issue a blanket ban prohibiting all self-invested pension plans (SIPPs) from holding protected rights.
In its response to the consultation document, Pensions: Contracted-out Benefits and Miscellaneous Amendments, the Department for Work and Pensions (DWP), says that after taking into account the comments from the 18 respondents, “the Government has decided not to proceed with the proposed blanket prohibition preventing all SIPPs schemes from holding protected rights”.
Instead from April 2006, this aspect of the legislation will just be updated to take into account the changes in tax legislation. This means that for the time being the only contracted-out personal pension scheme which can offer SIPP-style choices for protected rights is an insured product offered by an insurance company.
The DWP goes on to say that while the Government accepts developments in the SIPP industry makes this form of pension provision more suitable for a wider range of people than previously, it claims that as protected rights are the result of contracting out of the state second pension, it is appropriate that “a higher standard of prudential regulation should apply to contracted-out personal pension schemes.
But the response does add that the Government will review the position again, “once the current consultation on regulatory arrangements has concluded and the new arrangements are in place”. The Treasury consultation on "Proposed changes to the eligibility rules for establishing a pension schemes", ends this week, but the favoured option three, would not see the regulation coming into effect until April 2007.
The document also reveals the Government plans to introduce revised amending regulations from April 2006, so that a Sipp plan can be held in the “wrapper” of an “appropriate scheme” without invalidating the scheme’s contracting-out certificate.
Protected rights would still have to be kept separate and all the relevant requirements must continue to be met for the contracted-out part of the scheme, but it would remove the extra administrative costs, and the advice costs which arise from the setting up of two separate schemes.
Francis Moore, from the Association of Member-Directed Pension Schemes (AMPS), says the response shows some good progress in setting things up for the next stage of regulation in April 2007, but says that it has all been left a bit open-ended.
He adds: “It seems that the DWP wants to wait and see what the final shape and form of the potential SIPP regulation will be, as they tend to see the protected rights as Government money, and don’t want to see people investing the money unwisely and diminishing their private pension provision and being thrown back on the state.”
“We feel, in part, the DWP has not moved as far as we would like, as they don’t fully understand how SIPPs work. Over the next few months we’re going to be working closely with the FSA in working out the practical aspects of the regulations, and we want to get an idea of the mindset of the DWP so that we can make sure we give them what they require ready for the review in April 2007,” continues Moore, chairman of the AMPS and DWP liaison committee.
John Moret, sales and marketing director at Suffolk Life, feels that more could still have been done and expresses concern over the delays involved.
“This is quite disappointing, although it’s a step forward in the admission to allow SIPPs to accept protected rights, but there is a 15 month delay before the framework is in place to allow SIPPs to do that. It’s another example of one government department blaming another government department for the delay. In this case its the issue of the regulatory framework, but considering recent events, there is no guarantees that it will actually happen,” says Moret.
Although John Lawson, head of pensions policy at Standard Life, is absolutely delighted with the response, he also suggests the Government could have gone further and remove all the differences between protected and non-protected rights.
“This is something the industry has been pushing for, for some time, and we’re absolutely delighted with the DWP have come out with, but I would have liked to see them going the whole hog and removing all the difference, as at the moment you still have to use protected rights to buy a unisex annuity or a spouse’s pension. These differences could also have been removed,” says Lawson.
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 7968 4558 or email [email protected]IFAonline
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