Take a bigger SIPP

September 9th, 2008

If you are one of the growing numbers of people with a Self Invested Personal Pension (SIPP) you will probably know that this type of plan cannot currently hold protected rights funds.  These are funds built up as a result of contracting-out of the additional state pension, through either an appropriate personal pension plan (APP), or via a money purchase occupational pension scheme.

This restriction has always applied to SIPPS because it was the Government’s view that protected rights should not be subject to the risks that can arise from self-investment, especially as, until April 2007, the administration of SIPPS was not regulated by the Financial Services Authority (FSA). Now that SIPPS are regulated by the FSA however, the Government announced in June 2008 that it no longer considers this restriction necessary.

As a result, from 1st October 2008, it will be possible for any SIPP to be used as a contracting-out vehicle, as long as the SIPP provider concerned is in receipt of a ‘contracting-out’ certificate.  SIPPS intending to take transfers of protected rights funds only, without offering contracting-out, will also need this certificate.

Protected rights in a SIPP, whether built up through ongoing contracted-out National Insurance Contribution (NIC) rebates, or funded from a transfer-in, may then be invested in the full range of investments allowed under the tax legislation, and may also be aggregated with any non-protected rights fund for borrowing calculation purposes.

This significant change has been welcomed with open arms by SIPP providers and investors alike – which is hardly surprising given that up to £100 billion is currently locked up in protected rights funds (source Citywire 10th June 2008). It should be noted that this amendment does not extend to Small Self Administered Schemes (SSAS).

The FSA also currently require that when a firm sells an appropriate personal pension policy it must provide a “Contracting-out Comparison”. This allows you to compare the State Second Pension given up with the potential return from the appropriate personal pension. The FSA propose to amend their rules to extend this requirement to SIPP providers in respect of those who use a SIPP to contract out.

Furthermore, the Government also confirmed in June that the requirement to provide a 50% survivor’s pension for those who are married or in a civil partnership when buying an annuity in respect of protected rights funds will cease to apply after contracting-out on a money purchase basis is abolished (which is expected to be in April 2012).

From this date, schemes will no longer have to track protected rights separately and you will be able to choose the pension or annuity that best suits your circumstances.

This means that in addition to being able to buy a single life annuity, even if you are  married, you will also be able to attach a 10 year guarantee period to protected rights annuities and use protected rights funds to purchase investment linked annuities (neither of which is permitted currently). Unisex annuity rates will also cease to apply from this point.

In the meantime however, protected rights held in a SIPP (or any other registered pension scheme for that matter) will still need to be ring-fenced from the non-protected rights.
The levels and basis of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.  The value of your investment can go down as well as up and you may not get back the full amount invested.