The Department of Work and Pensions (DWP) has recently clarified that its policy intention is to make sure protected rights funds administered within self-invested personal pensions (Sipps) are not eroded disproportionately when compared to the rest of the pension fund.
Another body, the Association of Member-Directed Pension Schemes (AMPS) has been working closely with the DWP to clarify how protected rights monies are to be administered within Sipps. They have clarified matters with the DWP that they expect that where protected rights funds are placed into an income drawdown facility, a proportionate amount of non-protected rights monies must also be placed into drawdown. Any income taken from the income drawdown facility should be controlled to stop a higher proportion of the protected rights fund being taken as income.
The main thing to grasp is that if any protected rights funds that are in drawdown are transferred to a Sipp, it would automatically trigger a requirement to put the non-protected rights funds in that Sipp into income drawdown as well.
Advisers will have to take heed of these requirements when advising clients on consolidating any protected rights monies by transferring them to a Sipp. It might not be in a client’s best interests for all of their pension fund money to be placed in drawdown at one time.
However, all this brings is added complications for advice and administration, even if it is well intended. The DWP have stated the intention is for protected rights rules to drop away in April 2012 when contracting out through a money purchase scheme is expected to be abolished, but it does mean that there appears to be no real appetite to change legislation in the meantime to help simplification.