Protected rights pensions

benjamin_4

My father invested £2000 in a protected rights pension scheme in the early 90's. For one reason or another, he would now like to cash this policy in.

The company who administer the scheme can't offer this facility. Does anyone know why this is the case with 'protected rights' schemes? Which rights are protected exactly?!

Considering this, would we be able to transfer the pension to another company or structure which would enable him to cash in the policy? I have been reading about SIPPs and drawdowns on this forum, but I'm a bit unsure about what these terms refer to.

Regards and thanks in advance

Ben

Milarky

The only 'cash in' options are:

1) On death of the life assured, AND

2) At retirement [minmum age 55] when it would be the greater amount of
25 percent of the pension by value, OR
1% of the so-called 'pensions cap' of £1.5million - therefore £15,000

In general pensions cannot be surrendered for cash and 'protected rights' pensions can't be surrendered at all, presently, but will be eligible from next year to be encashed in the same limited circumstances as 'non' PR pensions

What 'PR' rights actually 'protect' isn't a guaranteed amount at all - just a targetted value which is meant to be equivalent to the additional or 'top up' state pension amount that your dad would have qualified for [at retirement] on his earnings in each year that he was in the PR arrangement, had he not joined. So he has a 'lump' of money instead, intended to buy an additional income [at 65] - although he can access it from age 55 at a lower rate.

Look up: 'Trivial Pension rules' and 'de minimus pensions' for a bit more help

EdInvestor

Hi Benjamin

My father invested £2000 in a protected rights pension scheme in the early 90's. For one reason or another, he would now like to cash this policy in.The company who administer the scheme can't offer this facility. Does anyone know why this is the case with 'protected rights' schemes? Which rights are protected exactly?!

At the moment, this money wouldn't be accessible in any way until your father was aged 60 and even then he would have to use all of the fund to buy an index linked pension.

But as of next April, assuming he is already aged 50, he will be able to "take benefits" from this pension, which means he can get 25% of its value in tax free cash, but must convert the rest into an annuity (an income for life).But this can now be a better value level annuity.

How much is your father's fund now worth and what funds is it invested in at which insurance company? It is possible to do drawdown with PR pensions, but it's probably not economic with smaller funds as they can't be trabnsferred to a Sipp under current rules

dunstonh

A £2000 fund is unlikey to have grown to over 100k. So drawdown is not really going to be an issue.

Waiting until next April would certainly be a better idea, as Editor says. In addtion, if this is the only pension he has, he may be able to withdraw it 100% as a lump sum if the amount is under 1% of the lifetime allowance.

EdInvestor

There is no requirement to have a fund worth 100k to do income drawdown.

dunstonh

There is no requirement but both the FSA and IFAs recommend that the 100k is the starting point for anyone considering it.

EdInvestor

Here's what the FSA actually says:

Charges for this type of annuity (income drawdown)are usually much higher than for basic annuities.

Unless you have several pension 'pots', most experts reckon that you need a fund of over £100,000 to seriously consider income withdrawal.

You will probably need expert advice and your fund will need to be reviewed at least every three years.

It's not quite the same, is it?

You only need 100k if you go through an IFA who selects an income drawdown plan with high charges, and if you have no other source of retirement income.

If you do have other income and/or you don't go through an IFA and instead select a low cost online drawdown of the type run by providers like Sippdeal, Hargreaves Lansdown,EPML or Alliance Trust, then you can do it cost effectively with a much lower fund.

[Note however that you can't put protected rights money in a SIPP so this route is currently closed to the OP.]

dunstonh

The FSA don't give advice so you will rarely seem them give wording that is advice. They issue guidelines and it is the job of the financial services companies to interpret those guidelines. When you see the FSA say "Unless you have several pension 'pots', most experts reckon that you need a fund of over £100,000 to seriously consider income withdrawal", you really need to read that as their view.

I do think you are seriously underestimating the risk potential on doing drawdown and giving people the wrong impression. Doing drawdown yourself is possible but not using an IFA in a case like that is very risky. There are serious issues to consider and if you are not aware of those you could lose an awful lot of money. I recently looked to do a drawdown case with a client that wanted to do it. Once the critical yield was known, it was too high to reasonably accept and we didn't do it. Had he done it himself, he could have ended up eroding his pension pot significantly.

It is a type of transaction for someone who knows what they are doing.

EdInvestor

There are a lot of issues involved IMHO, but the basic one is not to take more money out of the fund on a long term basis than the income the investments generate - that is, don't run down the capital.

This may mean you have to take a slightly lower income than with a level annuity (say 5% instead of 6%) - but for many people that's a small price to pay for hanging on to the capital. And it does depend on how the money's invested - it's not necessarily the case the income has to be lower for safety, there are other ways of risk adjustment.

An advantage is the possibility the fund can increase in value to cover inflation over the years - that's the major and scary risk with the level annuity, and there's nowt you can do to resolve it once your capital's gone.

Yes you need to know what you're doing, but it's not that hard to learn.Realistically for people with smaller funds, it probably does need to be DIY, as IFA charges will take too much of the fund.

dunstonh

Yes you need to know what you're doing, but it's not that hard to learn.Realistically for people with smaller funds, it probably does need to be DIY, as IFA charges will take too much of the fund.

I havent got a clue what the figures are but I would expect the number of DIY drawdowns to be tiny in comparison to the number of IFA arranged drawdowns.

This may mean you have to take a slightly lower income than with a level annuity (say 5% instead of 6%)

This is where risk comes in and its a case of balancing the investment areas with the income taken. In reality, it is usually more than just 1%. This is where the critical yield and the attitude to investment risk come into play.

I'm not wanting to put anyone off considering drawdown. If nothing changes before my retirement (which is unlikely. Probably another 2 pension reforms due before I get there), I will take drawdown. However, I will have significant other income to compensate for the lower amount.

In reality, most people don't save enough for retirement and cannot afford to take the hit on income to allow drawdown. For those that can, then it is an option that is available if they meet the attitude to risk criteria. A secure/cautious investor should not consider drawdown.

EdInvestor

dunstonh wrote:

I havent got a clue what the figures are but I would expect the number of DIY drawdowns to be tiny in comparison to the number of IFA arranged drawdowns.

I'm sure that will be so at present because the new cheap SIPPs only cropped up within the last couple of years: before that the costs didn't work for smaller funds.However as you know, SIPPs are now booming so the numbers will rise.

A secure/cautious investor should not consider drawdown.

Actually I regard myself as a secure cautious investor and I would not consider the alternative - an annuity.That's because I remember too well (like many people coming up to retirement now) the 1970s and the inflation we had then. An index-linked annuity, which would cover that is an expensive luxury which I certainly couldn't afford and that's the only genuinely secure approach.

Of course we should also remember that many people will have two index linked state pensions to cover their basic needs. Many people will be able to trade down and obtain a cash lump sum from their home.Many are probably still on final salary pensions where drawdown doesn't apply either.

But as more companies switch over to money purchase and GPP schemes you can see that demand is going to grow. Especially now that annuities are not compulsory any more.

It's a pity they haven't quite yet managed to sort PR pensions so that they could be fully amalgamated with PPs in a SIPPed drawdown .That would help some people quite a bit.