For most of the working public, the whole subject matter known generally as ‘pensions’ has always consisted of incomprehensible, meaningless jargon.
Then along came ‘pension simplification’ or, in other words, another 1,400 pages of closely type legislation — little of which was understood by the general public and all of which was certainly not simple.
So, at the risk of losing the audience, I want to take you back to the heady days when personal pensions were first introduced.
One of the facilities then was that you could “opt out” or “contract out” of what was called The State Earnings Related Pension Scheme (SERPS) — now known in today’s jargon as The State Second Pension (S2P). This was a perfectly simple and straightforward operation.
If you elected to do this then the Government paid certain rebates directly into what was called an Appropriate Personal Pension Scheme (APP) and they became Protected Rights Pensions.
At the same time various rules were put into force regarding how these “pots” of money could be invested and how the benefits were to be taken and, as many of you may be aware, made them very different to the Non-Protected Rights Personal Pension.
The idea of having investment restrictions was that, as they replaced the state system, they should be put into very “safe” investments.
And while this sounds fine in theory, you have been able to invest in Japanese smaller companies and other similarly risky funds for some time now with your protected rights and so the “safe” argument has not really worked.
Skip forward now a number of years and witness the rise of the SIPP, or Self-Invested Personal Pension and note that originally you could not transfer the protected rights part of your existing pension into a SIPP.
However, the Department of Work and Pensions (DWP) has reversed that decision and decided that you now can. Simple so far? But, up until now only insurance companies could set up an APP and so the main SIPP providers could not offer this facility.
this is a chance to examine the whole of the marketplace
But again, because the law is changing, SIPP providers will be allowed to offer APP’s and thus the full range of investments permitted by HMRC.
On the down side, the providers will have to track protected rights separately and there are still a number of restrictions that will remain in place after October 2008. The main ones being:
- If you buy an annuity you must buy a spouse/civil partner 50% joint life annuity.
- If you die before taking an annuity it can only provide an income to the surviving person.
However, there is some good news in the offing as the DWP has decided to abolish all differences between the two types of “pot” in 2012. Meanwhile, there will be a rather messy transition period. So what does all this mean for the man or woman in the street? Well, you may well find yourself in receipt of a mailshot, or another strategy encouraging you to put your protected rights funds into a SIPP.
But be warned. A SIPP is not suitable for everyone and, just because you can do it does not mean that you should.
Also, if you are in the throes of having to take pension benefits, do not jump at the first offer. All maturing pension schemes come with the offer of what is called the Open Market Option.
This is your chance to examine the whole of the market place and to take expert advice. There are lots of products that will never appear on the finance pages of the Sunday papers or the Internet.
So, the only way to inspect a number of useful tools is to see an Independent Financial Adviser who has access to all such retirement options and all of which can now take your protected rights money.
Nicholas Watts is an independent financial adviser with Positive Solutions Financial Services which is regulated by the Financial Services Authority. To contact him, use the website www.realwealthmanagers.co.uk