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OPDU Report 25
- November 2008 As finances get tight in the present economic downturn there is likely to be less “new” money available for investment in pension plans. Not surprisingly perhaps therefore that pension plan providers and IFAs are looking at a change in regulation which could provide a very large of capital funding to plug the gap. This concerns what for many are two of the most arcane topics in pensions – protected rights and self invested personal pensions (SIPPs). How do these come together? Well, with effect from 1 October 2008 for the first time it is now permissible to transfer protected rights funds into SIPPs opening the door for a surge of transfers into SIPPS and, in my view, the very real prospect of another mis-selling scandal. Let’s start at square one and consider the facts. Protected rights are, as the more initiated will know, derived from the national insurance rebates which those personal or stakeholder pension plan holders who have chosen to contract out of the state second pension (formerly SERPS) receive from the Government annually at the end of the tax year to which they relate. And we are talking large numbers here. There are about 8 million people who have been contracted out for at least some of the time since the option was introduced in 1988 and are in total holding protected rights funds to the value of some ￡100 billion. For some people – mainly I suspect existing established SIPP investors– this will undoubtedly be a welcome change enabling monies which had been held previously in under performing funds to be retrieved and paid into a SIPP. For others entering the SIPP market for the first time could be completely the wrong thing for them to do and dependent on the quality of the advice they have been given could give rise to claims for mis-selling later on. For the right person a SIPP can be and often is an excellent pensions savings vehicle. SIPPs offer much greater investment freedom and personal control than conventional personal pension plans. They provide the ability to invest in such things as directly held shares, investment trusts, exchange-traded funds, warrants, fixed income securities and commercial property. This can all be very advantageous for what you might describe as the more sophisticated investor, someone with the time and inclination to want to study the market and have a largish fund available for the purpose. But that is clearly not everyone and would–be investors need to take great care to understand and take account of other possible downsides. SIPPs often carry higher charges than conventional plans. Advisers’ commission is frequently also added on top the other charges increasing the cost overall of owning a SIPP. Then there are dealing charges for buying – and sometimes selling – investments as well as management costs for investment funds. These sorts of charges can wipe out the benefits, particularly for those with smaller pension pots who do not make full use of the added flexibility. There are some low-cost SIPPs, giving access to top-performing managers via a single platform, but if you don’t need lots of extra bells and whistles you might end up paying more for no extra benefit. Another risk is that by transferring you could be giving up valuable guaranteed annuity rates on an existing plan. There could also be exit charges which many insurers have introduced in the form of market value reductions (MVRs) to prevent a run on funds in the present market turmoil. Anyone considering transferring must therefore question as a minimum what the costs will be and why they are worth paying. Although the changes to the rules and the flexibility they offer are very welcome overall, it is important that the potential benefits of SIPPS are not over-hyped. There is often high commission charges on SIPPS for advisers and they and SIPP providers seem to have been pretty active of late in promoting these new style plans as a suitable vehicle for protected rights funds. I sincerely hope that doesn’t lead us down the road into another mis-selling scandal which the consumer does not deserve and frankly the pensions industry cannot stand. That would really spoil the party for everyone. Malcolm McLean OBE |
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