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Do the rights thing

Self-investment of protected rights from October 1 presents the biggest pension opportunity since A-Day. In the last 10 years, personal pensions have received over £25bn in contracted-out rebates. Allow also for the first 10 years of rebates from 1988 plus investment growth and it is a fair guess that these funds now add up to between £75bn and £100bn.

This is dwarfed by the value of contracted-out rights in defined-benefit schemes. All DB rights earned after April 1997 are treated as contracted-out rights and on transfer to a personal pension they become protected rights. Assuming an average of four million people a year have been acquiring a 1/60th benefit, the cash value of these rights alone could be worth £250bn.

Add in the cash value of guaranteed minimum pensions built up before 1997 and protected rights held in contracted-out money-purchase schemes and total actual or potential protected rights could be worth £400bn.

All this money will not suddenly transfer into Sipps but some wealthier clients will value the opportunity to consolidate their pension savings in a Sipp.

This will drive away funds from traditional insurers towards Sipp administrators but advisers should consider whether the Sipp offers the full range of options that clients will expect. One such option is guaranteed income drawdown. By definition, only insurers can offer protection against longevity risk. Where does that leave the non-insurance Sipp administrators? If they are to offer guaranteed income options, their only solution is to have insurers’ funds (trustee investment plans) available on their platform.

But why would insurers, with their own Sipps, allow competitors to access their competitive advantage? If insurers do allow non-insurance Sipps to access income guarantees, will they offer them at a higher price?

Another group of clients to consider are SSAS members who also hold protected rights in a personal pension or potential protected rights in a DB scheme. The new rules apply solely to Sipps and not SSAS. If these clients want to exercise investment control over all their pension rights, Sipps are the only option.

The Government said in June that it will remove the remaining protected rights’ shackles, probably from 2012, allowing married people to buy a single-life pension. Such clients might consider deferring annuity purchase or opting for income drawdown now.

John Lawson is head of pensions policy at Standard Life


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