There has been a lot of talk about the positive impact on the self-invested personal pension market of the simplification proposals, particularly the opportunities arising from the new investment freedoms. However, far less has been said about the increasingly restrictive impact of the governing rules on protected rights.The Pension Schemes Act 1993 laid down conditions for an appropriate pension scheme, that is, a scheme which can accept protected rights. The act was amended by the Personal Pension Schemes (Appropriate Schemes) Regulations 1997. The conditions are broadly that a personal pension can be an appropriate scheme only if it is an arrangement for the issue of insurance policies or annuity contracts, a unit trust scheme or an arrangement for the investment of contributions in an interest-bearing account. Clearly, a Sipp does not meet these conditions and, consequently, traditional insurance companies have a virtual monopoly over the provision of protected rights investment vehicles. Protected rights funds frequently make up more than 50 per cent of transfer values, particularly as all final-salary benefits accrued after 1997 have to be treated as protected rights in a transfer from a contracted-out scheme. Put this alongside the fact that most Sipps are funded by one or more transfer values and the significance of the restriction starts to become clear. The Department for Work and Pensions recently published a consultation document on two draft statutory instruments including the Personal Pension Schemes (Appropriate Schemes) (Amendment) Regulations 2005. An accompanying note which forms part of the consultation document says: “The draft regulations make amendments necessary to continue to prohibit self-invested personal pensions from contracting out following repeals in the Finance Act 2004 and ensure that Sipps are prohibited from being appropriate schemes. We are proposing amendments to regulation two of the appropriate schemes regulations that will insert a definition of a Sipp and continue to prohibit this form of scheme from contracting out.” Not surprisingly, many Sipp providers have reacted with alarm at the proposed continuation of this restriction. Why the DWP believes it is necessary to continue to impose the restriction is unclear. It certainly flies in the face of simplification. At first, I thought it would be a catalyst for the proliferation of artificial arrangements using private or self-select funds. However, it now appears that the new regulations would preclude such arrangements from accepting protected rights – a matter of some concern to the handful of insurance companies specialising in the provision of these types of fund. If implemented, the regulations could encourage long-term investment of Sipp protected rights in cash or deposit funds alongside insurance company funds, unit trusts and Oeics. While not necessarily a problem, this ignores the fact that history has demonstrated that many insurance company funds and, indeed, some insurance companies are neither safer nor likely to provide better returns than more direct investment, including private discretionary management. But it is not too late for the DWP to think again. It has accepted that other restrictions on protected rights need to be removed. For example, from A-Day, it will be possible to give effect to protected rights from age 50. A consultation process is under way and my understanding is that the DWP has given a sympathetic hearing to organisations such as the Sipp Provider Group. Most advisers have clients who have been or potentially will be affected by the proposals. The availability of protected rights funds to assist with, say, the purchase of commercial property could make a significant difference after A-Day, when the new lower borrowing limit of 50 per cent of the net fund value will apply. If you feel strongly on this issue, there is still time for you to make your voice heard. The consultation period runs until Thursday, May 5 – a date of other significance. The consultation document and amending regulations can be downloaded from the DWP website at www.dwp.gov.uk/ consultations/2005/index.asp while responses can be sent to the DWP at ContractingOut@dwp.gsi.gov.uk. I feel sure that the DWP would be particularly interested in examples where an individual’s investment choice has been artificially curtailed by the restrictions. I should also draw attention to the fact that at least one Sipp provider claims to have found an alternative approach which works. This apparently involves the establishment of a Sipp governed by a master trust with a parallel scheme set up alongside and subject to the trust which is able to receive the protected rights. I have no first-hand knowledge of this arrangement but I am assured it does work. However, this type of scheme is an unnecessary complication. What is needed is a commonsense approach which, while acknowledging the particular nature of protected rights, also allows investment strategy to be determined on an unimpeded basis alongside non-protected rights. If the new investment regime is a step too far, then I feel sure that most advisers and providers would find some restrictions along the lines of the current Sipp permitted investments acceptable.
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In my previous piece in this series of articles examining recent and imminent changes to pension planning, I started to concentrate on issues affecting the decision as to whether or not an early leaver from a final-salary scheme should consider transferring their benefits to a private pension arrangement. I discussed the vital importance of considering […]
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