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Pension edge: John Moret

I am not sure who coined the phrase “Simple solutions seldom are.” However, Peter de Savary hit the nail on the head when he said: “The great fault all over the world in business is that people overcomplicate and forget that the main ingredients for success are common sense and simplicity. I use lawyers and accountants as little as possible.” To whom he could have added civil servants.

Alan Pickering’s brilliantly simple concept – “A pension is a pension is a pension” – is already in danger of being lost in the gobbledegook which seems to infiltrate all pension material once it gets in the hands of the political draughtsmen.

There has been some truly radical thinking on pension simplification but, unfortunately, the reforming zeal of the Treasury has not been met by the same enthusiasm from the Department for Work and Pensions.

I want to highlight one small area by way of example. It relates to self-invested personal pensions, which in some form seem likely to be the individual pension savings vehicle for the vast majority after A-Day.

In 1989, I took a transfer value in respect of some old occupational scheme benefits and invested it in a personal pension. The amount was small – around 15,000 – and the transfer value was split almost 50/50 between protected rights and non-protected rights. At that time, Sipps had not been conceived so I took out an insurance company-based personal pension. I invested the protected rights funds cautiously and adopted a riskier approach with the non-protected rights funds, utilising a range of sector funds including a maximum growth fund.

Thereafter, inertia prevailed – commonplace, I suspect, with many such investments. I made a couple of switches over the next 15 years but to little avail. When I last checked, the protected rights funds were showing an annual return of around 7 per cent over 15 years, with the non-protected rights funds some way behind at just over 5 per cent a year.

These returns are pretty disappointing. Fortunately, my retirement income is not totally dependent on this personal pension. Had I, for example, been invested directly in commercial property over this period, the returns would almost certainly have been significantly higher. Unfortunately, that was and still is impossible.

The Pension Schemes Act 1993 lays down conditions for an appropriate pension scheme, that is, a scheme that can accept protected rights. The conditions are broadly that the personal pension must be an arrangement for the issue of insurance policies or annuity contracts, a unit trust or a deposit account. Clearly, a Sipp as currently defined does not meet these conditions. As a consequence, traditional insurance companies have a virtual monopoly over the provision of protected rights investment vehicles.

Now, you may be under the impression that all this will change with pension simplification. Certainly, adoption of the Pickering philosophy would imply so. However, I regret that you would be mistaken. Correspondence I have seen recently makes it very clear that the DWP has no intention of lifting the restrictions. Indeed, it apparently plans to table amending legislation which will mean that a Sipp, which under the new regime will be able to hold residential property and other investments, will be unable to hold protected rights funds.

Why the DWP believes it is necessary to continue to impose these investment restrictions is unclear. It certainly flies in the face of simplification. It will be a catalyst for the proliferation of artificial arrangements using private or self-select funds. It could encourage long-term investment in cash or deposit funds. Perhaps most important, it ignores the fact that many insurance company funds are neither safer nor likely to provide better returns than direct investment, as exemplified by my personal experience.

In my case, my protected rights fund is currently worth around 20,000. This is quite small by today’s standards since it relates to a limited period of past service. Advisers will be able to confirm this and also will know that a protected rights fund of over 50 per cent of the total transfer value is far from exceptional.

It is not too late for the DWP to think again. It has accepted that other restrictions on protected rights will need to be removed, for example, from A-Day it will be possible to give effect to protected rights from age 50.

Why persist with a restriction which will only serve to confuse and may prevent investors from optimising their ultimate pension?Clearly, the DWP should “Kiss” and make up with its Treasury colleagues.

John Moret is director of sales and marketing at Suffolk

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