Question: What issues will advisers need to be made aware of now that protected rights can be invested in SIPPs?

Each month, we ask our industry to answer one big question!

David Andrews is director, individual pensions at HFM Columbus Partners

This is a welcome - if belated - aspect of pension simplification and will doubtless increase clients' interest in SIPPs.

The well publicised credit crunch and other recent economic challenges have highlighted the need for effective investment management for individual pension arrangements. Strategies that have included exposure to, for example, hedge funds, commodities and 'protected' vehicles have fared better than those comprising traditional 'long only' collectives, to which insurance company funds and therefore protected rights have hitherto been restricted.

The new investment freedom for protected rights therefore presents a significant opportunity for investors and advisers.

For existing SIPP holders, life is pretty straight forward. Transfers in should be cost effective, relatively simple transactions and will, in many cases, simply enlarge an existing investment strategy.

But there are also those for whom this development increases their total 'SIPP-able' fund to a viable level, in terms of justifying the charges associated with a SIPP.

Nick Bladen is head of pensions & bonds marketing at Skandia

With all the changes to the rules governing the pension industry, an adviser is wise to review the overall plans of the client in light of the new development. A review of the client's needs and future requirements will have to be undertaken to determine the suitability of any type of personal pension - stakeholder, personal pension and SIPP. Central to this consideration is the degree of sophistication and investment control that the adviser believes is appropriate for each client. Many will be better off leaving their arrangements as they are, for others investing their protected rights into a SIPP could be beneficial.

As with any recommendation, clear benefits to the client will have to be demonstrated and documented before retirement plans can be amended. To achieve this, advisers will need to have a very clear picture of the stance of the SIPP providers they conduct business with.

Andy Bowsher is director of self invested pensions at Xafinity

Simply because protected rights can be held by a SIPP does not automatically mean that they should be. For instance a high net worth client with an existing SIPP, containing large funds and actively using the investment features of a 'true' SIPP, may well see this as an ideal opportunity to consolidate and continue to use his SIPP effectively. In contrast a client with a SIPP largely invested in life office funds may find there is little benefit in consolidating.

For providers there are a number of practical issues to consider, particularly if they have no current exposure to protected rights in their business. Firstly, what will illustrations look like, particularly as the FSA isn't proposing to make illustrations mandatory for SIPPs generally? It's also unclear whether contracted-out comparisons only apply for new rebates. The FSA's rules indicate that the comparison illustrations are only required when a customer is making the decision to contract out - however, protected rights annuities need to be illustrated using different annuity rates, so there are some differences that need to be taken into account.

Secondly, recent press articles seem to suggest that the 50% survivor rule, together with the requirement for tracking protected rights separately, is to be abolished as part of the October changes. These contrast with the DWP response to the consultation process which suggests the current rules will remain in place until money purchase contracting-out is abolished in 2012.

Peter Carter is head of product marketing at Met Life UK

The Government believes the changes provide greater flexibility and investment choice to people who want to take an active interest in managing their funds while also enabling them to consolidate. All of that is to be welcomed.

However, it is not quite that simple. IFAs need to carefully weigh up the issue of charges before advising clients to move their protected rights.

There is no point in advising clients to invest protected rights in a fully-fledged SIPP with potentially higher charges if they are going to remain in insured funds.

The ideal solution could be a deferred SIPP.

Maureen Duckworth is pensions technical manager at Scottish Life

The key issue for advisers is suitability. Is a transfer to a SIPP of protected rights money in the best interests of the client? There are many personal pensions in the market offering the majority of clients what they need. Advisers should be wary of transferring clients to SIPPs when the fund choice available in a personal pension meets the needs of their clients, while offering better value for money.

In addition, advisers face the usual challenges. Transfers from occupational type arrangements require a full transfer analysis. So, while the range of investments that SIPPs offer may be attractive to clients, the value of any existing guarantee, combined with more expensive charges in a SIPP, may act as a barrier to any transfer.

Where a transfer to a SIPP is in the best interests of a client, advisers should document clearly why this is the case.

Andrew Gadd is head of research at The Lighthouse Group

From an IFA's perspective this means that clients will be able to combine their pension money in one SIPP, allowing holistic investment planning and a greater level of investment flexibility.

Advisers will, however, need to ensure that anybody advised to switch their protected rights into a SIPP are doing so for the 'right' reasons and customers are, as the FSA deem it necessary to tell us, 'Treated Fairly'. An example is the possibility that the effect of charges in a SIPP could be higher than the current pension arrangements. IFAs will therefore need to ensure that any transfers into SIPPs are accompanied by full disclosure showing the possible pension at retirement and the effect of charges together with a full explanation of the added benefits, from the client's perspective, of transferring to a SIPP.

Robin Hooper is managing director of The Lifetime SIPP Company

The whole point of protected rights benefits is that they were intended to 'underpin an individual's retirement planning (in addition to the basic state pension) and also provide benefits for any dependants'.

However, previous refusal to allow benefits to be invested within a SIPP seems to fly in the face of logic. After all, an individual who has a self invested personal pension must, almost by definition, be someone who wishes to take control of his or her retirement planning and has the wherewithal and experience (or appropriate advice) to be able to do so.

In our view, the move to allow investment freedom for protected rights within all SIPPs is a logical step which we welcome. What is not so helpful, however, is a delay in confirming the precise rules which, once again, prevents SIPP providers from planning well in advance of the start date.

John Lawson is head of pensions policy at Standard Life

The ability to self-invest protected rights is a welcome relaxation of protected rights rules. This is a huge opportunity for advisers as there is already an estimated £100 billion of protected rights in personal pensions and a further £250 billion in defined benefit schemes, that would become protected rights if moved to a SIPP. Protected rights can only be self invested via a SIPP, so SSAS clients with appropriate personal pensions may consider consolidating both in a SIPP instead. Also, advisers should choose their recommended SIPP carefully. Not all SIPPs currently have, or will in future have, guaranteed income options (variable annuity type options), and it is difficult to see how these could be regarded as full SIPPs if they do not offer the full range of income drawdown choices.

Helen Miller, is marketing manager at Merchant Investors

Advisers need to be aware that there are still two types of SIPPs in the market, and the debate will remain whether to use an insured vs. trustee SIPP. Insured schemes are subject to a more restrictive investment scope, but can offer greater FSCS protection. The trustee SIPP may have less FSCS protection but has the ability to invest in a wide range of investments.

In the lead up to October and beyond, it should be known that there are a number of 'future proof' SIPP's available today. These allow the wider range of investment for the non-protected rights plus self investment of the protected rights within the same scheme. This type of scheme has been possible from 2006 under a relaxation of the DWP's rules.

These schemes will allow a full trustee SIPP investment range for both the protected rights and non-protected rights come October. When the regulations come in, all that will happen is that the wider investment range the member has for the non-protected rights, will be automatically extended to the protected rights fund.

Francis Moore is managing director of European Pensions Management

Advisers can look again at customers' protected rights investments now that there is no need to have two pensions pots. The improved flexibility to invest protected rights into SIPPs means that increased customer choice will result in a bigger appetite for advice as competition between SIPP providers' swell and new products come on to the market.

Advisers will therefore need to be more aware of the different offerings and how they can be best applied to individual circumstances. For those advisers not yet fully conversant in the world of SIPPS then the time to develop product knowledge is now.

John Moret is director of sales and marketing at Suffolk Life

Advisers will need to review their clients with SIPPs to see whether any have protected rights that warrant potential transfer. It is also possible that they have a handful of clients where the inclusion of protected rights makes self-investment viable such as geared property purchase.

In selecting a provider, advisers should focus on the same issues that apply for non protected rights such as the track record and experience of the provider in administering SIPPs, web enablement, investment flexibility, pricing including the impact of VAT and looking into all costs not just the headline ones. Longevity of the provider is also important as uncertainty over ownership may introduce unnecessary risks.

Ian Naismith is head of pensions market development at Scottish Widows

Self-investment of protected rights is not new, and has been available from a small number of providers for some time now. However, extending the facility to all SIPPs brings new challenges to advisers, particularly because it is likely that many SIPPs will not provide projections of possible pensions or of the effect of charges. This makes it very difficult to demonstrate to clients and to the FSA that the transfer provides real value for money, with sufficient value added to justify any difference in cost. In addition, a high proportion of protected rights includes guarantees and clients must be aware of the risk of moving from a relatively secure investment to one that may be much more volatile.

Pamela Reid is executive director of Citi Quilter

The release of this money from insured funds allows for the inclusion in an investment strategy that is designed to meet the objectives and risk profile of the member.

Our initial enquiries to pension administrators revealed that some will require this to be kept separate from other SIPP money, while others are apportioning the fund and holding one investment account. The adviser will need to ensure that the member is aware of how this will be managed and whether these extra funds will carry the same strategy and timescale to the rest. The only retained requirement for protected rights is that an annuity, when bought, should cover a spouse/civil partner benefit. I would expect most investors to choose protected rights funds to be assimilated into the overall strategy.

Jason Walker is a senior manager at AWD Chase de Vere

People may have taken a lower risk with this money previously and now by allowing protected rights into SIPPs the investment choice and risk profile can be significantly increased. Advisers should be wary of investing in too high a risk strategy if the clients are relying on this income to supplement the state pension. However for clients with sufficient pension provision the relaxation of the rules will provide clients with much more choice and potential diversification than before. Death benefits with protected rights will still be different to a standard personal pension. Under current legislation protected rights benefits must pay out an income to the spouse on death so there is no option to take a lump sum. Another important distinction is the difference in Financial Compensation under different SIPP structures. Insured SIPPs are covered by the Financial Services Compensation scheme and protect 90% of the assets with no upper limit. Trustee SIPPs are also covered by the Financial Services Compensation scheme and protect 90% but this is capped up to a maximum of £48,000. Overall this is a significant change to SIPPs as a substantial amount of money is currently in protected rights.