Guest article, written by Chris Wicks.

The government has just introduced new rules which will improve the choices available to millions of pension policy owners. The rule changes, which will come into effect on 1st October 2008, affect those with Protected Rights Benefits. These are acquired when an employee person opts out (known as Contracting Out) of the State Second Pension S2P (previously known as the State Earnings Related Pension Scheme- SERPS).

Protected Rights can be acquired in a number ways:
1. Via a Personal Pension or a Stakeholder pension. Employees pay the full rate of National Insurance Contributions. After the end of each tax year the Revenue work out how much has been paid and rebate a part of this into the employee’s plan (something I am frequently asked about and the subject of a later blog).
2. Via Contracted Out Money Purchase Schemes (known as COMPs). These are employer sponsored pension schemes. The employees pay reduced National Insurance Contributions and the employer makes minimum contributions to the scheme.
3. Via Final Salary Pension Schemes (also known as Defined Benefit Schemes). These are schemes that provide a promised level of benefits to members when they retire, typically based on their final earnings and years of service. Where the scheme has opted out of S2P, these are expressed in the form of a pension but they can be expressed as Protected Rights or converted especially if the benefits have been transferred.
4. On divorce or termination of a Civil Partnership where a Pension Sharing Order is made. In such circumstances the pension benefits of one of the spouses/civil partners is allocated under a Court Order to the other. The benefits can be provided within the same scheme but more typically the scheme will require that they be transferred out.

Successive governments have imposed restrictions on the way in which Protected Rights may be paid out. Quite a few rules have been removed in the last few years and the remainder should disappear all together from 2012. However, for now, benefits must be taken from age 50 (55 after 5th April 2010) and these must include a spouses/dependents benefit. It is also currently a requirement that they only be invested in insured pension arrangements.

On 1st October 2008 the new rules will allow Protected Rights Benefits to be transferred into a Self Invested Personal Pension (SIPP). Until recently these types of schemes were not regulated and as a consequence transfers of Protected Rights into them were prohibited. SIPPs allow investment in a wide range of assets including stocks and shares, investment funds and commercial property. It is also possible to borrow 50% of the value of the assets in the fund to assist with the purchase of new investments, such as buildings.

The ability to invest in commercial buildings is particularly useful to business owners wanting to invest in new premises. SIPPS can even be used to buy the premises already owned by the business, thereby releasing the capital locked up in the building. The proceeds received by the business can be used to help finance expansion, or even to simply pay off accumulated debts.

If the SIPP buys trading premises for the business, the business is required to pay a market rent which is fully relievable against its taxable profits but received tax free by the scheme. As the scheme does not have to pay tax on its rental income all of it can be used to reduce its borrowings. This results in the earlier repayment of the borrowing which means less interest will be paid.

A group of SIPPS owned by different individuals can collectively purchase premises. This is a method used by quite a few professional firms such as lawyers and accountants as well as doctors and dentists.

This is not just an opportunity for new investments but also for top-ups to existing schemes. These can be used to make additional investments. Alternatively the additional funds can be used to reduce scheme borrowings.

As with any transfer of benefits it is important that professional advice is taken from an appropriately qualified independent financial adviser. They will be able to review all of your options for you as well as make sure that you are fully aware of any adverse consequences of transferring your benefits.

Chris Wicks is a Certified Financial Planner and Director of N-Trust Limited.

He blogs on his specialist subject of pensions and retirement income at http://chriswickscfpretirementspecialist.blogspot.com

The recent strike by workers at the Grangemouth refinery that put the nation’s oil supply on the line was brought about because of threatened changes to the workers’ pension scheme. People are getting hot under the collar about final salary pension schemes closing to new entrants at last, but I fear it’s too late. Far too late in fact.

Final salary pension schemes are referred to quite nostalgically these days as the ‘gold standard’ of pensions. They were all the rage in the 1960s and 1970s and the funds held in them grew to titanic proportions in the heady days of the 1980s and 1990s.

 
Those titanic funds hit the iceberg of reality at the turn of this new century and for the last few years boards of directors up and down the land have been manning the pension lifeboats now that the Government has stopped them jumping ship. It’s not been possible since 2003 for solvent companies to walk away from their pension liabilities. These days companies have to buy their way out.

The first step most private sector companies with final salary pension schemes have taken is to close them off to new entrants. Around 80% of our private sector pension schemes are now closed to new entrants. According to the Association of Consulting Actuaries (the ACA) only around 900,000 private sector employees are currently in final salary schemes that are open to new employees.

At the moment that number still includes the employees working in the Grangemouth refinery, but it won’t if the changes proposed there go ahead. Bit by bit, up and down the land, our private sector final salary schemes are having the lights turned off.

Closing schemes to new employees is a bit like cutting the roots off a plant. Without the new entrants coming into the scheme it will eventually wither on the vine. As more and more people leave the closed schemes through retiring or changing jobs, say, and are not replaced then the number of private sector employees accruing final salary pension rights will be reducing all the time. Every day fewer and fewer people working in the private sector are building up salary-related pension rights. One day nobody will be.

In stark contrast to what’s happening in the private sector in the UK our public sector final salary schemes are as strong as ever. Today around 5 million employees in the public sector are in final salary schemes that are still open to new employees.

Those figures, of less than a million employees in the private sector against around 5 million in the public sector, tell you all you really need to know about what the pensions landscape is likely to look like in the UK in a few years time.

Our private sector final salary schemes will have been almost completely replaced with cheaper and, for employees, riskier money-purchase schemes, whereas public sector employees look likely to hold on to their gold standard pensions.

But at what cost to the public purse? There’ll be loads written about this one day when it’s so obvious that even Joe and Josephine Average can see what’s going on. Mark my words.

Steve Bee is head of pensions strategy at Royal London Group where he publishes his BeeHive blog at www.scottishlife.co.uk/beehive

Steve bee writes every week for citywire at http://www.citywire.co.uk/personal/-/personality-finance/Making-the-most-of-it/list.aspx