At last, investment choice for your  UK pension.jpg

At last, investment choice for your  UK pension


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Steve Rodgers is International Financial Planning Adviser with Blacktower Financial Management Group.

OVER THE last 20 years, most employed people in the UK could choose to be contracted out of the State Second Pension, or its predecessor known as SERPS, into a personal or stakeholder pension.

In return, they would receive an annual rebate of some of their National Insurance payments invested into a personal pension. This money is called protected rights, but you may also know it as a ‘contracted out pension’ a ‘SERPS pension’ or an ‘Appropriate Personal Pension’ (APP).

Many more people will have done the same through their Occupational Pension Schemes at work.

Until April 2006, money invested under the so-called ‘protected rights’ rules had to be invested in a pension fund run by a life insurance company, and the whole fund had to be used to buy an annuity – an income for life – when you came to retire.

Contributions made before 1997 also had to be used to provide a compulsory spouse’s pension of 50 per cent of the pension benefit, even if the contributor was not married. Since reforms that took place in 2006, protected rights money has been treated more like the benefits from a personal pension, so the holder can take a 25 per cent tax-free lump sum, but he or she still had to purchase an annuity, with benefits for a spouse if he or she had one, with the remainder.

Many of these investments have been left to languish in poorly performing with-profits funds, or simply forgotten about.

Flexible SIPP

New rules which came into effect on October 1, 2008 allow you to transfer these ‘contracted out’ pension benefits to a Self Invested Personal Pension (SIPP).

The Government had previously balked at allowing protected rights money to go into SIPPS. The official view was that pension rights intended to replace State entitlement should not be subject to the risk that can arise from self-investment.

However, the Department of Work and Pensions announced that the previous restrictions preventing SIPPS from holding protected rights are now considered unnecessary, following changes which, from April 2007, brought all personal pensions – including SIPPS – under the auspices of the City watchdog, the Financial Services Authority.

Protected rights held within traditional insurance company pension arrangements have often performed poorly and have offered policy holders a limited investment choice.

Transferring to a SIPP gives you the opportunity to breathe new life into these often forgotten and neglected pension funds.  

It also gives you the opportunity to consolidate your pension funds into just one more manageable pot.

Holding pension assets in a SIPP – which can accommodate a wide range of investments including shares, gilts, unit trusts, investment trusts, insurance company funds and even commercial property – enables individuals to either make decisions associated with their overall investment portfolio themselves or use a financial adviser or stockbroker to implement the changes on their behalf.

You also have more choice at retirement, for example, by using income drawdown instead of buying an annuity. Income drawdown allows you to take pension income direct from your fund while keeping the remainder of your fund invested.

Unlike an annuity, the amount of income available from ‘drawdown’ is highly flexible between zero and a generous maximum.  (NB – after age 75 further restrictions are imposed.)

Death benefits under a SIPP can also be more generous than other options.  


Those readers who do not envisage returning to the UK to live, might also consider transferring their UK pension rights, including ‘contracted out’ pension benefits to a Qualifying Recognised Overseas Pension Scheme (QROPS).  These can offer further advantages over a SIPP but are mostly only suitable for larger fund values due to their higher charges.

Like SIPPs, QROPS can also provide flexible income by ‘withdrawal’ direct from the fund.

Using income withdrawal to provide an income is a potentially complex affair. This is because you are running the risks as to whether your income levels can be sustained and if your capital may last through retirement. This all creates the need for ongoing financial advice.

The current low value of equity markets does, however, provide a strong opportunity for anyone switching into a drawdown fund. Although it is impossible to say where equity markets will go in the next few weeks and months, over the longer term I am sure there will be some substantial profits for anyone prepared to wait.  

Transferring a pension is not a decision you should take lightly. We strongly recommend that you speak to a financial adviser qualified in pension transfers who can explain what action is appropriate.

Beware – If benefits have already commenced under an existing SIPP, taking further benefits from your protected rights funds may lead to a review of your maximum pension. If your SIPP has fallen in value since you commenced benefits, the review could lead to a reduction in the amount of income that you can withdraw from your SIPP.

Opting out of SERPS using a personal pension was first allowed in 1988, so it may be worth checking if your existing personal pension or your employer’s pension scheme hold protected rights.

To check whether you are or have ever contracted out, call the HMRC Contracted Out Pension Helpline on 0044 (0)845 915 0150, open 8am – 5pm Mon-Fri. You will need your national insurance number to hand.

You can also get more information from The Pension Service (part of the Department for Work and Pensions) or by phone on 0044 191 218 7777.

Please contact Steve Rodgers of Blacktower Group for further information. Call 289 355 685 or email [email protected]