Self Invested Personal Pensions (SIPPs) are about to receive significant boost. From this October, the restrictions which prevent Protected Rights from being invested in a SIPP are being removed. It is calculated that this will mean a potential extra £100 billion of pensions assets can now be invested in these flexible and, most importantly, self-directed pension schemes.

Protected Rights refers to that element of an individual’s pension that is paid as a rebate of their National Insurance Contributions if they have contracted out of the State Second Pension, an option that was introduced when personal pensions were created some 20 years ago as an incentive to encourage people to take
them out.

Extra Protection
They are intended to ensure that a basic level of benefits is secured from the contracted out pension. As such, the Government doesn’t want you to take any risks with this money, with the result that the Protected Rights element of a pension have, so far, been ringfenced from the rest of an individual’s pension savings, and held in low risk assets.

Contracting out is due to be abolished from April 2012, but those Protected Rights funds built up by those who have taken advantage of this rebate will remain in the hands of the individual investor. According to SIPP provider Hargreaves Lansdown, the average current value of a contracted out investors’ Protected Rights would be worth £16,500, a tidy sum to form the basis of a long-term investment. Indeed, some investors may have over £50,000 in their Protected Rights pot.

The advantages of a SIPP are that, unlike a standard insurance-based pension plan, it gives the investor control of their pension fund, with the scope to include a wide range of permitted investments.

Choosing wisely
However, choice can be a dangerous thing, particularly if you adopt the wrong investment strategy or choose an underperforming investment manager. Again, Hargreaves Lansdown point out that a £16,500 Protected Rights investment could grow to £52,000 over 20 years from an investment strategy returning an average 7 per cent per year.

However, if the average annual return dropped to 5 per cent, the total would only be £36,000.

Of course there is much more to SIPP investing than Protected Rights – indeed, many investors may decide that their Protected Rights funds are better left in a low risk environment - but the holders of these funds should at least consider moving them into the greater flexibility of SIPP arrangement.

SIPPs themselves have developed significantly over the past decade or so and now offer investors the opportunity to spread their pension investments across a wide range of assets, from cash and fixed interest securities, through shares and investment funds, to commercial property and some of the more high octane investment instruments, such as ETFs, CFDs and Warrants.

A flexible approach
How you use this flexibility is up to you. Some SIPP investors will have the desire, the time and the knowledge  to make all of their investment decisions themselves.
Others, however, will use the services of a broker or financial adviser to devise their investment strategies. But which ever route you take, you need to follow an active management strategy if its going to make investing in a SIPP worthwhile.