Self investment of protected rights will bring a whole new flexibility to retirement planning. However, Richard Ellis points out some of the potential hurdles
The DWP confirmed in June this year that protected rights funds will be available to all SIPPs from October. Recent press coverage has estimated that the protected rights market could be worth as much as £100 billion and with so much uncertainty surrounding this issue it makes sense to introduce a level playing field.
Before we can fully understand where we are today and what may happen from October 2008, I feel it is important to go back to basics and look at the history of SIPPs and protected rights.
Reading the recent headlines you might be forgiven for thinking that self-investment of protected rights in SIPPs is something new, when it has been possible, through the right kind of SIPP, since personal pensions were first introduced in 1988.
We carried out some research among financial advisers, and in 2007 just 22% of financial advisers surveyed correctly believed you could fully self-invest protected rights if you used the right type of SIPP. A year on we repeated the survey and this figure had increased only slightly to 31% - still demonstrating a significant gap in understanding.
What follows is a back to basics look at protected rights and SIPPs and aims to clear up this misunderstanding.
Trust & Insurance based SIPPs
There are two main types of SIPP available on the market today. Those launched in 1989 by Nigel Lawson, often referred to as trust based SIPPs which are offered by the majority of the industry, and those available before 1989 which are referred to as insurance based SIPPs.
The difference between these structures relate to the level of protection available and the type of investments allowed, specifically around the investment of protected rights. Currently, only insurance based SIPPs can self-invest protected rights.
In March 2005 the Government carried out a consultation which explored the investment of protected rights within SIPPs and proposed that all non-insured SIPPs should be prevented from holding protected rights money. However, the response in December 2005 reaffirmed that the "... only type of contracted-out personal pension scheme which can offer SIPP-style choices for protected rights is an insured product offered by an insurance company ..." therefore the status quo remained that insurance based SIPPs could self invest protected rights albeit with restricted investment choice and trustee based SIPPs could not.
The reason for keeping the status quo in 2005 was that the investments under an insurance company SIPP were subject to regulation whereas trustee based SIPPs were at the time unregulated. The Government stated that it would review its position post April 2007 when all SIPPs became regulated. A consultation paper containing the draft regulations was published in December 2007. In delivering the consultation paper, the Minster for Pensions Reform announced that these proposed regulations "will give people more freedom to choose where they invest their pension savings" because from October 2008 it is proposed that all SIPPs should be able to offer self-investment of protected rights.
This leaves the question as to what to do in the lead up to October.
Looking forward ...
Having a level playing field is great because it gives the flexibility, choice and control required by the more sophisticated SIPP investor. So from October investors can hold all their money under one wrapper with protected rights now having the same investment choice as non protected rights.
However, before everyone rushes off to invest their protected rights perhaps we need to study the devil in the detail which may be the undoing of some providers.
One of the most interesting short term effects this announcement will have is that protected rights held in SIPPs will still need to be separately identified from other funds until further rule changes are made in 2012.
For some providers this will not create a problem but for others having to identify protected rights and non protected rights will mean system upgrades. Ultimately this could mean that some providers will not be ready by October.
Some providers may look to solve this problem by running two separate accounts, and levy two sets of charges, one for the protected rights and one for non-protected rights.
So although this is great news for the investor I would suggest caution before diving in and it will be fascinating to see how the industry and fellow providers adapt and move on over the next few months in light of this change. It's about time the industry had another shake up!
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