Many a slip 'twixt Serps and Sipps as insurers chase your money

Many a slip 'twixt Serps and Sipps as insurers chase your money

Thousands of people who opted out of the state second pension have, since last Wednesday, been able to transfer their savings into a self-invested pension plan, or Sipp. They can invest in anything from shares to commercial property - but these often expensive, higher-risk schemes could leave many investors worse off.

It is estimated that around eight million people have 'protected rights' pensions. These came into being in 1988, when the government decided to encourage employees to opt out of the state earnings-related scheme (Serps), which it believed would become too expensive to maintain. Instead it offered to pay part of their National Insurance contributions into an appropriate personal pension and gave extra bonuses to those who moved out of the state scheme in the early years.

Advertisement starts

---

---

Advertisement ends

Insurers were eager to get their hands on this money and encouraged people to opt out. The main incentive was the potential to gain a higher pension at retirement than from Serps, though this depended on investment performance. Most who opted out had their contributions invested in with-profits or unit-linked managed funds.

Someone who has stayed opted out of the additional state pension since 1988 could have a protected rights fund worth around £53,000, say stockbrokers Killik & Co. The same benefits in occupational pension schemes will also be transferable to Sipps, with as much as £350bn 'up for grabs' says HSBC.

However, there are worries that some Sipps may have been mis-sold. The Financial Services Authority is to publish the results of a review later this year prompted by concerns that advisers were being influenced by the high levels of commission on offer.

Savers with protected rights will face conflicting advice. Tom McPhail, head of pensions research at Hargreaves Lansdown, which offers its own DIY Sipp, says: 'Most people with appropriate personal pensions would be better off in a Sipp because they will have access to better performing investments.' However, Malcolm Cuthbert, managing director of financial planning at Killik, who offer their own Sipp, takes the opposite view: 'It will not be right in most circumstances for employees to transfer to a Sipp because they won't want to take the extra risk.'

One problem is that Sipps are often expensive. Charges on protected rights pensions tend to be around 1 per cent a year, whereas on Sipps they are more likely to be 2 per cent. Stock market falls mean savers holding with-profits policies are likely to suffer a 'market value reduction' if they move. Ian Naismith of Scottish Widows points out that policyholders could also be giving up a guaranteed return: 'Some early with-profits policies included guaranteed growth rates of, say, 4 per cent.'

Another consideration, according to Graham Barber, head of financial planning at Rensburg Sheppards, is the difference in protection: 'Individuals need to be aware that if they move from an insurance contract to a trust-based Sipp, the potential compensation from the Financial Services Compensation Scheme will be lower.' Insurance schemes fall under the Policyholders Protection Act, which guarantees 100 per cent of the first £2,000 and 90 per cent of the rest with no limit; under the FSCS the maximum compensation is £48,000.

Where the protected rights pension is performing badly, it could be worth moving, but it doesn't have to be transferred to a Sipp. 'It can be switched to another personal pension,' says Mitchell. 'A personal pension is going to cost less and offer better protection.'

guardian.co.uk © Guardian Newspapers Limited 2008