SIPPs and Protected Rights

The current restrictions on transferring protected rights (i.e. pension funds that have built up from the National Insurance rebates for those who have contracted-out of the State Second Pension) to a SIPP are a source of great frustration for those people who want to consolidate all their pension rights into a single self-invested pension arrangement. The current rules result in protected rights being left out of any such consolidation exercises - they are either left in the original pension scheme or transferred into an 'appropriate personal pension scheme', typically a stakeholder pension scheme or an insured personal pension.

The pensions industry has been pushing for some years to remove these restrictions but, to-date, these attempts have been unsuccessful as this specific issue has got caught up in the much bigger and incredibly complex issue of how to sort out contracting-out generally. It had been intimated by the Government that the transfer restrictions on protected rights might be removed from 6 April 2007, when SIPP administration became a regulated activity, but this was not to be.

However, on 6 June some light entered this particular tunnel when Lord Mackenzie (the Parliamentary Under-Secretary of State, Department for Work and Pensions) announced that the Government now wants to remove as many of the rules relating to protected rights as possible, which would allow protected rights to be transferred to a SIPP. However, there is still a big 'but' here.

At present, protected rights must provide a spouse's/civil partner's pension entitlement on the individual's death and the Government has not yet decided if it is prepared to remove this particular requirement. If this requirement is removed then protected rights can be transferred very simply into an individual's SIPP and invested together with the other assets held in the SIPP for that individual. If this requirement is not removed then it will still be possible to transfer the protected rights into a SIPP but it would be necessary to maintain a separate record of the SIPP fund that relates to the protected rights since it will have different death benefits to the remainder of the fund. This would significantly complicate the administration of the SIPP.

No dates have yet been specified for this change but there are lots of technical hurdles to be overcome before it can be implemented,. So, though we would like to see this implemented much sooner, we think that it's unlikely that any changes in relation to protected rights will take place before April 2009. However, we'd love to be proved wrong on this,

Our view is that the original concept of contracting-out, i.e. to ensure that substitute benefits are provided in private pension arrangements that fully replicate the State Second Pension rights given up through contracting-out, has been watered down so much over the years that there is little merit in maintaining special rules for protected rights relating to death benefits. We would strongly urge the Government to remove all restrictions relating to protected rights, particularly since the amounts transferred to SIPPs are, in any event, available to provide death benefits.

We are well aware of the deep frustration caused to our advisers and SIPP clients by the current restrictions on transferring protected rights to SIPPs and we are committed to allowing protected rights to be held within our SIPPs as soon as the Government changes its rules to allow this.

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