From 1 October 2008, it will be possible to incorporate ‘protected rights’ funds into a Sipp and invest the money as you wish.

Currently, the investment of protected rights within Sipps is heavily restricted and even where a Sipp provider accepts protected rights money, the funds can usually only be invested in cash, bonds and insured funds and the funds normally have to be kept ringfenced from the rest of your Sipp.

You may have protected rights funds if you have opted out of the State Earnings Related Pension Scheme (Serps, now known as S2P) at any time since 1988 and set up a personal pension to invest the National Insurance rebates and incentives offered by the government to do so. 

Between £75 and £100bn of protected rights are believed to be held in personal pensions and a further £250bn in final salary schemes.

Protected rights could constitute up to 40 per cent of your pension fund - a significant amount of money which could be consolidated within a Sipp, making the administration and management of your pension much easier and possibly generating cost savings too.

Tom McPhail of IFA firm Hargreaves Lansdown says: “The ability to invest protected rights money within Sipps from 1 October is all about investment freedom and the facility for people to take control of their funds.

“For instance, if protected rights money is currently invested in a poorly performing insurance company managed fund, you could, for instance, move it into a top performing unit or investment trust, ETF, shares, property, bonds or any other investment permitted by your Sipp provider.”

Another benefit is that protected rights can be put into income draw down (now known as Unsecured Income). However, if you are married and want to buy an annuity before 2012, you must use your protected rights money to purchase a spouse’s annuity as well. After 2012, this restriction will be lifted.

Contracting out via money purchase pensions will be abolished from 2012 anyway, so now may be a good time to think about what you want to do.

For more on Sipps, read our guide:

http://www.defaqto.com/consumer/pensions/compare-sipps/guide-to-sipps.aspx

Visit www.sippsupermarket.com

A  host of ‘third way’ retirement products and US-style variable annuities have been launched in the UK over the last two years, driven by historically low annuity rates and a desire for greater financial flexibility in retirement.

The players include The Hartford, Lincoln National, Met Life, Living Time (AIG), Canada Life, Aegon/Scottish Equitable and the Prudential. Standard Life and Axa are expected to enter the market later this year.

Most of the new products fall somewhere between annuities and Unsecured Pensions - the latter being a form of  income drawdown, the facility to keep your pension fund invested in the stockmarket, while drawing an income, instead of buying an annuity.

The US-style variable annuities involve an insurer providing a minimum guaranteed income for life which can  ratchet up if the underlying funds rise in value.

This sounds great in theory, but guarantees come at a cost and this has been the main criticism of the new wave of ‘third way’ retirement products.

The guarantee will only benefit you if your fund would otherwise have been exhausted by withdrawals and/or falling stockmarkets before you die.

Insurers offering these products that you are far more likely to outlive your assets than you realise and that the cost of the guarantee represents good value.

Many financial advisers, however, beg to differ, saying that the present roster of products are too expensive to be worthwhile to pensioners.

Research from Fidelity conducted in October 2007 appears to support this view. Fidelity calculated that the probability of a 65 year old man exhausting his capital by the time he reaches age 95 is almost one in 16.

This assumes that he withdraws 5 per cent from a £50,000 fund with a 1 per cent annual management charge and is invested  50/50 in bonds and equities. By adding on a 1 per cent charge for a guarantee, the probability of the fund being exhausted increases to one in five.

But a 65 year old may not live to age 95 anyway. When a 65 year old’s life expectancy is factored in, the odds lengthen to a one in 50 chance, but only if he was not paying for a guarantee throughout the term of the product.

So while these third way products are a welcome innovation, they need further refinement before they become attractive to those reaching retirement today.

Retirees can secure similar guarantees and flexibility by mixing and matching their pension fund and savings via a mix of annuities (with profit, unit-linked, index-linked and so on) and Unsecured Pension (an Alternatively Secured Pension after age 75).

This strategy avoids having to pay for costly guarantees and leaves the retiree with greater flexibility to cope with changing circumstances, such as death of a spouse and the need for nursing care in their final years.

For more on your options at retirement, read the Defaqto guides:
http://www.defaqto.com/consumer/pensions/your-options-at-retirement.aspx
http://www.defaqto.com/consumer/pensions/your-options-at-retirement/guide-your-options-retirement.aspx

Try out the Defaqto Annuity Calculator:
http://www.defaqto.com/consumer/pensions.aspx
 

 The debate over the Retail Distribution Review continued apace with Whitechurch chief executive, Kean Seager, predicting it could kill off up to 20 per cent of the intermediary market.
 
Skandia supported a split between advice and sales but that is should be applied across the whole of the financial services market.  Sesame called for advisers planning to retire in the next 10 years to be relieved of the requirement to achieve diploma equivalent qualifications.
 
Aegon chief executive, Otto Thoresen, branded the RDR as too complex and that the industry was trying to deal with too many things at once.
 
But change could be in the offing as new FSA chairman, Adair Turner, described the RDR as ‘ongoing,’ and that he would also scrutinise the TCF requirements when he takes up his new post in September.
 
Amanda Bowe is to step down from her role as FSA head of RDR after the feedback statement is published in October.
 
Elsewhere, HBOS claimed the FSA did not know what form ‘management information’ should take by the March deadline for firms to have Treating Customer Fairly procedures in place and AIFA said the FSA would have difficulty in proving the cost/benefit of the TCF initiative.
 
Meanwhile, the Government said the Personal Accounts Delivery Authority (PADA) would be given significant state funding, with only a long term objective to become self funding.  It said this was justifiable on the grounds that the scheme would have to accept workers whom commercial pension providers would find unviable.
 
But in a backdown on its original proposals, PADA said employers will be able to use their existing methods of calculating pay when working out whether they will be exempt from placing employees into personal accounts from 2012.
 
The row over delays by insurers in making annuity payments rumbled on, with some firms calling for the worst offenders to be named and shamed.
 
Living Time marketing director, Dave Harris, called for the open market option (OMO) to be the default option for people buying annuities nd urged IFAs to spurn annuity commission when clients purchased one from their existing provider without advice.
 
Retirement Partnership managing director, Steve Lewis, suggested that insurers should inform pension investors of the OMO facility five years before retirement. Meanwhile the ABI is considering cigarette packet style warnings on pension marketing material as a way to encourage greater uptake of the facility to shop around.
 
Elsewhere, AIFA said it believed the FSA was considering bringing in a 15-year long stop for customer complaints, despite the RDR interim report erring against it.
 
There was much excitement about the business opportunities presented by the easing of the protected rights self investment rules from 1 October, with industry experts predicting a boom in Sipp business.  There’s  an estimated £100bn sitting in personal pension protected rights and a further £250bn in contracted-out final salary schemes.
 
But the new rules will only apply to Sipps and not SSASs and Scottish Widows expressed concern that those in low cost pensions might be mis-advised to transfer into Sipps.
 
Elsewhere, Fitch Ratings predicted that early entrants to the variable annuity market could be the big winners as this new form of annuity could become a quasi-replacement for with profits.
 
The trade press unearthed past legal skirmishes that Dolly and Brian Pickering of IFA firm, Heather Moor & Edgecomb, have had with the FSA and the Appeal Court.  Only weeks ago, the couple were hailed as IFA champions for refusing to pay FOS fees for four customer complaints which were not upheld by the Ombudsman.
 
Meanwhile, Clerical Medical did a swift U-turn on its cancellation of trail commission where advisers were not offering ongoing service. Elsewhere, industry experts predicted a fall-off in mortgage procuration fees.
 
A survey by MetLife showed that two thirds of IFAs’ clients were seeking different ways of planning for retirement as a result of stock market volatility.
 
The Parliamentary Ombudsman at long last recommended that Equitable Life policyholders should receive compensation for losses, with late joiners expected to be the most likely to benefit from any lifeboat fund.