Managing Your Money 

Sipps: are they for you?

Trust some of the hype and there can only be one option for your protected rights fund - a transfer into a self-invested personal pension (Sipp). But, while many investors will be better off shifting, it's not always the case.

A number of factors will determine whether a Sipp is right for you. One of the first things to consider are the charges. "You've got to weigh up the charges on your protected rights scheme against the charges on a Sipp," says Billy Mackay, marketing director of AJ Bell and Sippdeal. "Sipps can be more expensive than simple stakeholder plans, but there are a lot of expensive old protected rights charging structures around too."

Even where your current scheme is cheaper it might still be sensible to shift. With access to any fund as well as shares, gilts, bonds and commercial property, Sipps offer much wider investment choice than any protected rights fund.

Flexibility and convenience

This greater flexibility may be all the more apparent against some of the more dated protected rights products. With some of these, funds will be closed to new business. This can often mean there's little investment into their management so performance can go off the boil. Mr Mackay adds: "Investing is cyclical, with new themes and investment ideas coming through every few years. If you're in a protected rights scheme that's closed to new business, chances are you'll only have access to a small range of funds that were in fashion 20 years ago. It's not ideal."

Consolidation is another reason for bringing together all your pension funds within a Sipp. "If you consolidate your pensions it's much easier to run your investment strategy," says Malcolm Cuthbert, managing director of financial planning at Killik & Co. "Everything will be in the same place, so you can instantly see a breakdown of your portfolio and tweak it where necessary."

As many of the Sipps have online functionality it's possible to be actively involved in running your portfolio. For instance, Mr Mackay says you can enjoy features such as research capability and monitoring tools that will give you an overview of how each part of your portfolio is performing.

You can also tap into better rates with a larger fund. Interest rates on Sipp cash accounts often increase the more money you have in them and flat fees, for example set-up costs and transfer fees, will be proportionately lower the larger your fund. You could also get a better deal on an annuity by having a larger fund.

Dealing charges can also fall the larger the amount you buy and sell. As an example, Sippdeal charges £9.95 for deals of less than £500 and £14.95 if they're between £500 and £2,000, but once you get over £2,000 there's a charge of 0.75 per cent capped at £30. This cap would kick in for deals of more than £4,000.

Mary Stewart, marketing director at Hornbuckle Mitchell, says she has also seen a lot of interest from people who want to reduce their borrowing. "Where someone has borrowed on their Sipp to fund the purchase of a commercial property, we're seeing them looking to transfer in their protected rights funds as a way of reducing this borrowing," she explains. "It's much more cost-effective to pay down debt than to leave the money invested."

Although big might be beautiful, the size of your protected rights fund won't affect its suitability for transfer. Of the £100bn or so that's in protected rights, much will be in plans worth a couple of thousand pounds or less. However, Tom McPhail, pensions research manager at Hargreaves Lansdown, says this won't mean a Sipp isn't possible. "It's not about the fund size. Because we don't have a fixed fee set-up charge we're happy to accept transfers in of as little as £1,000."

This is the same with many of the other providers, including James Hay, Killik and Sippdeal, who have also moved to a charging structure that doesn't include a set-up fee. This makes the economics of moving to a Sipp much cheaper.

The cleaner charging structures also mean you might not end up paying more than you would have in a personal pension anyway. On many schemes - especially those run by the insurance companies - if you stick with investing in funds, you'll generally pay no more than if you were in a bog standard personal pension.

After all, although this shuns the more exotic investments available, your decision to move to a Sipp might be for the benefits it offers in the future. You might want to move to a Sipp if you're planning to take your retirement income through drawdown. Most protected rights funds will restrict you to taking an annuity, but a Sipp will give you much more flexibility about how you take your pension benefits.

Guarantees and penalties

But not everyone should move - some protected rights pensions offer more than any Sipp could. John Gleadall, senior manager for wealth policy at Legal & General, recommends checking for any guaranteed annuity rates on your protected rights scheme. "Unless the funds available for investment are rubbish, it's probably worth hanging on to a guaranteed annuity rate," he explains.

Other guarantees can also pump up the value of your protected rights scheme. These may include a guaranteed interest rate on a fund and a higher level of tax free cash.

Penalties may also mean you're better off staying put. Transfer penalties on a protected rights pension aren't very common, although you might run into a poor transfer value on some schemes. Mr McPhail explains: "I wouldn’t necessarily recommend moving a protected rights scheme if it was a final-salary scheme as the benefits are good. On top of this, you'll generally find that the transfer values are very poor."

However, while most protected rights schemes have no transfer penalty, there are plenty of instances where you could get stung with a transfer on a fund. Francis Moore, managing director of European Pensions Management (EPM), explains: "Some funds are still levying punitive transfer charges, particularly for with-profits funds. This will reduce the probable benefits of improved performance."

He adds that,where such a penalty is in place, it will be necessary to weigh this up alongside factors such as the size of the fund, level of charges and confidence in the prospects of improved returns from a Sipp.

Sound advice

Additionally, if you're not massively interested in taking an active role in your pension plan then it's probably not worth moving to a Sipp. "If you're not bothered about having access to all manner of esoteric investments, including shares and commercial property, then a Sipp isn't really right for you," says Ms Stewart. She says that if someone is perfectly happy with the choice they're offered through a personal pension then there's no real need to move to a Sipp.

Given all the factors that can affect whether a transfer is right for you, it can be sensible to seek independent advice. "An independent financial adviser will have to run an analysis of your pension situation, looking at your protected rights scheme as well as a Sipp. This will look at charges and take into account other details such as fund choice and performance, any guarantees and flexibility," says Mr Gleadall. "This will give you a much clearer picture of what you have and why you might be better off moving."

Although there will often be a charge for this type of work due to its complexity, some advisers are offering a transfer assessment for free. For instance, Killik & Co will review your existing pension schemes free of charge to help you decide whether you should consolidate in a Sipp or leave everything where it is.

But, whether you go for a free service or decide to pay for it, Gleadall adds: "The Financial Services Authority is cracking down on pensions being transferred for the sake of it so there would need to be a valid case for an adviser to recommend a transfer to a Sipp."

How to transfer

Once you've decided that transferring your protected rights fund to a Sipp is right for you, the transfer process is relatively simple.

Unless you already have a Sipp, you'll need to set one up, so that it can accept your transfer. As soon as it's set up you can ask the provider for a transfer form, which will request details of your protected rights pensions. "Return this to the Sipp provider and it will send it on to your current provider, who will send you a discharge form containing details of the available transfer value," explains John Gleadall, senior manager for wealth policy at Legal & General. "You then sign this and return it so the transfer can take place."

How long it takes to shift your protected rights pot into your Sipp will vary greatly. Francis Moore, managing director of European Pensions Management (EPM), says: "Some life companies can make transfers in five working days, others take months. One benefit consultancy takes a shameful nine months."

Additionally, once we hit 1 October, the date at which protected rights funds can be transferred, these timescales are likely to increase. Tom McPhail, pensions research manager at Hargreaves Lansdown, recommends getting started as early as possible. "I've got three protected rights funds that will be transferable and the paperwork is already sitting with my Sipp provider so it can start the transfer process as soon as possible," he explains.

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