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John Lawson: Protected rights offer review opportunity

With RDR implementation less than six months away, advisers might be forgiven for devoting most of their time and effort to that particular project. However, it is also important to consider business as usual activity, including any opportunities which legislative change throws up.

One such change that took effect in April this year was the removal of all remaining restrictions applying to protected rights money. This is generally good news. For example, people can now buy a single life pension at retirement, if that is what best suits their needs. But probably the biggest change is that the whole fund can be paid out tax-free on death before retirement.

Whilst these changes happen automatically and, on the face of it, no action is necessary, there is still an opportunity for review.

Many of those old contracting out plans were taken in the late 1980s or early 1990s, since when successive governments have shown less enthusiasm for this policy. With no incentive to improve these plans, insurers have made little investment to modernise them in the last decade.

In some cases though, old can be good. This particularly applies to with profits investments which can enjoy guaranteed rates of investment growth. Standard Life has with profits pensions with 4 per cent guaranteed growth. This is nearly one percent above the redemption yield on long gilts, the supposed risk-free rate.

If your clients have such investment guarantees, they should hang onto them for as long as possible and certainly avoid trading them in until the economic outlook is more predictable.

If your clients have remained invested in old managed funds, it is likely that they have done less well recently. Many of these funds are large and immobile and do little more than track the markets they invest in. Even worse, the ones closed to new business have been forced sellers, unable to pay claims out of new premium income, which has a further negative impact on returns.

In their heyday, appropriate personal pensions attracted nearly £6bn a year in new premiums. Whilst this may now have fallen to roughly £2bn, contracting out has been around for over 20 years. My guess is that at least £75bn has been invested in these plans whose current value must easily top £100bn. Retirements will have been rare up until now as break even ages for taking the rebate have always tended to be south of forty-five.

This is a therefore a market worth taking seriously, accounting for £1 in every £3 of individual personal pension savings.

In addition, assuming that level commission of 4 per cent still applies to the £2bn current inflow, advisers are about to lose £80m a year in revenue starting this year.

These facts should provide every incentive to advisers to review these clients, primarily to find a more modern and suitable investment solution, but also to consolidate where appropriate.

These clients may also be under-saving, and now may be an opportune time to persuade them to replace the rebates with their own voluntary money.

John Lawson is head of pensions policy at Standard Life

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  1. David Trenner - Intelligent Pensions 19th July 2012 at 12:38 pm

    “Standard Life has with profits pensions with 4 per cent guaranteed growth. This is nearly one percent above the redemption yield on long gilts, the supposed risk-free rate.”

    John, you do not mention the 0% bonus currently applying to your pensions with-profits fund for the 8th successive year, nor the equity holding which seems to be ensuring that this is really a non-profit fund with a 4% guarantee.

    4% is not bad, but I suspect that Standard’s equity fund managers would tell us that they expect to achieve more than this over the next 10 years, so for a medium+ investor with several years to 65 there could be better options.

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