SIPP choices gain credence

However the government has now confirmed in its feedback on consultation that the rules surrounding protected rights will be removed allowing them to be invested in Appropriate Personal Pensions (APPs) including Self Invested Personal Pensions (SIPPs).

The change follows strong lobbying from the industry which claimed that by treating protected rights differently – including not allowing self-investment and the requirement to buy a spouse's annuity – made pensions administration more complicated.

That said, the changes proposed by the government mean that the requirement to buy a spouse's or survivor benefit when purchasing an annuity will not be removed until 2012, while pension providers will also need to separately track protected rights investments and keep them ring-fenced until contracting-out for defined contribution schemes is abolished in 2012.

In addition, John Lawson, head of pensions policy at Standard Life, points out that while members of SIPPs will be able to self-invest their protected rights monies, the government has excluded Small Self Administered Schemes (SSASs) from this change.

The consultation response stated that because SSASs are occupational schemes they are "outside of the Appropriate Schemes Regulations" and as such they have to meet the conditions that currently apply to contracted-out occupational schemes, which are "different to those applied to APPs".

It states, "consequently, the changes consulted on in these regulations will not enable small self-administered schemes to invest protected rights".

Lawson points out that while the SIPP market is likely to benefit, the rule change "could be another nail in the coffin for SSAS" as telling people they cannot self-invest their protected rights or that they have to take out a SIPP as well as a SSAS "isn't a viable option".

However Hargreaves Lansdown claims that while the changes to the protected rights legislation – which is estimated to free up around £100bn in money available for self-investment – will boost the SIPP market, it could negatively impact insurers.

It argues that the £100bn of protected rights monies forms part of the £440bn managed by UK personal pensions, and up till now insurers "have enjoyed a virtual monopoly on managing these assets".

However Lawson claims it will only be insurers without "market-leading SIPPS" that will suffer under the new rules, as although most insurers have a SIPP "of some description" many have not been prepared to sell it effectively.

He says these are the ones "who are going to lose out as they'll lose the protected rights monies and it won't be going into their SIPP", particularly as Lawson believes at least £50bn of this money will be "hovered up by SIPPs" from outside insurers.

Lawson also warns that insurers might not be the only ones to suffer, as he suggests non-insured SIPPs - those offered by non-insurance companies – could lose business by not offering guarantees around drawdown and annuities.