Restrictions will be lifted allowing SIPPs to hold protected rights from 1 October 2008.

Protected rights are benefits payable at retirement age derived from funds built from rebated National Insurance Contributions (NICs) and paid into an appropriate personal pension plan by the Government. These benefits are a substitute for part of the State Second Pension (S2P).

The ability to contract out of the S2P has been with us for more than 20 years and it is not uncommon to find individuals with accumulated funds of between £20,000 and £50,000.

At present, individuals cannot transfer their protected rights into a SIPP, the view being that rights intended to replace state benefits foregone should not be subject to the risks that can arise from self investment. However, existing restrictions preventing SIPPs from holding protected rights will be lifted on 1 October 2008.

Individuals with existing SIPPs will be able to transfer their protected rights plans into their SIPPs, giving them more investment flexibility as well as fewer pension plans to administer. In turn, SIPPs can hold a wide range of investments, which can be managed by the pension fund member, his/her nominated investment adviser or a stockbroker. These changes will help make clients' affairs simpler going forward.

It will be interesting, however, to see whether the changes will have a damaging effect on the investments held by insurance companies which have, traditionally, managed protected rights funds. A mass exodus to SIPPs would be another blow to insurers, following hard on the heels of changes to the CGT rules, which have made their investment bonds less attractive from a tax perspective.

If you would like to explore whether your protected rights funds should be transferred elsewhere, we would be pleased to advise you.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.