Pensions World

Now that SIPPs have reached maturity, is the market in decline? asks Allison Plager.

Who wants a self invested personal pension (SIPP)? Lots of people it would seem. SIPPs have grown in popularity in the last few years, not only for the individual investor, but also for companies looking for a defined contribution (DC) scheme. SIPPs started out as the preserve of the wealthy, but have now become almost mainstream.

Group (or corporate) SIPPs are used by some companies in conjunction with share schemes, ie, shares from the plan are rolled over into the GSIPP when they mature. The employee can then either keep the shares or diversify into different stocks. Group SIPPs have also traditionally been used as an alternative for high earners to top up their pension, but some companies use them as a DC scheme for all employees.

As Standard Life’s Michael Craig says, the GSIPP’s flexibility makes it “better placed to meet the needs of a diverse workforce all the way up to and including the managing director and members of the board”. For it to work, he says it must be possible to “switch off certain features and SIPP costs where they are deemed inappropriate” for employee categories. This is to avoid paying SIPP charges where individuals are investing only in insured pension schemes. Scottish Widows’ Ian Naismith agrees that where the GSIPP is the only option offered to the workforce “it is important that charges reflect the investment needs of staff and that they are not paying for facilities they do not need”.

However, it may be that employers are becoming less keen on a GSIPP for all. Capita Hartshead’s Paul Sturgess says, GSIPPs appeared to be particularly popular 12 months ago, for example with BT putting in a scheme for all its employees. Now, he says the trend seems to be for employers to offer a GSIPP to specific employees as an extra plan for the highest earners, in the way perhaps that GSIPPs were traditionally used.

Tax

No one can have been too distressed to see the previous government’s complex proposals for changes to higher rate tax relief for pension contributions disappear. Furthermore, the new rules, capping the annual allowance at £50,000 and the lifetime allowance at £1.5m, were largely what the pensions industry had called for as a substitute.

Given that SIPPs are largely aimed at those with high earnings, will the new rules have a significant impact on their continued growth?
It seems not; while acknowledging that the new regime is bound to have some effect, the industry seems confident that SIPPs will maintain momentum. Steve Latto at Alliance Trust Savings believes that the market for SIPPs will remain “buoyant as tax relief will be available at an individual’s marginal rate of tax. This makes SIPPs attractive across all income brackets. In addition, with the carry forward provisions also applying to SIPPs this provides added flexibility.”

Jeremy Stevens at AXA Wealth Winterthur agrees that the market will not be damaged, saying that “only a few clients will be impacted, but SIPPs will remain a valuable alternative to accrued DC and DB scheme benefits where clients want a wider range of investment options and greater control over their investments”.

Furthermore, it seems that business is booming for some: Stewart Dick of Hornbuckle Mitchell has “seen volumes for new SIPP business continue to increase”, and expects to see more growth in the coming months. He says “the recent turmoil in the economic climate has proved difficult for everybody, including pension investors. However, problems need solutions and SIPPs in particular are very well suited to allow clients to adapt to circumstances and get the maximum benefit from their pension. For example, an individual may have suffered a loss on a personal share portfolio as markets fell. By making an in specie contribution of this portfolio to their SIPP, the tax relief received on the contribution will go some way to offsetting the losses incurred plus, as the shares are now in the SIPP, any future gains will be free from capital gains tax (subject to the normal contribution limits).”

TABLE Selection of GSIPP and SIPP providers

Legal & General (L&G) believes that the new contribution levels “will still be sufficient for most customers and that carry forward will also assist” but that “it is too early to gauge the impact of the new rules”. On the whole, L&G expects that pension saving will “remain at the centre of successful tax planning for all and continue to be a core differentiating employee benefit in the workplace”.

Indeed this, in essence, is likely to be the case, as the government is keen to promote pension saving, but not on giving too much tax relief away.

So whether sales of SIPPs will continue to burgeon after the new tax rules come in remains to be seen. As Mr Sturgess says, the changes will have an impact and he wonders if it will encourage employers to offer employees wider savings schemes within a corporate wrap. For example, this could include a group individual savings account, with all its tax attractions, which may suit some employees more than a pure pensions offering.

It is possible to use different providers of each type of scheme, offering a “best of breed” wrap, adds Mr Sturgess, to spread the risk, ie not relying on one provider for everything.

Fees

SIPPs, whether group or individual, have always been relatively expensive to set up and therefore often a barrier to potential purchasers. The point of a SIPP is that the investor has the freedom to chop and change his investments and each transaction attracts a charge.

Charges for ordinary personal pensions dropped when stakeholder pensions were introduced, so someone who is not likely to take an active interest in his pension plan beyond making contributions should consider a personal pension over a SIPP.

However, it seems that charges are on the way down. A report on SIPPs published in summer by Defaqto showed that the average set up fee and the average annual administration fee for SIPPs have fallen for most fund sizes over recent years. For example, the combined average set up and annual fee for a £50,000 investment has fallen by 11.1% over the last three years from £675.41 to £600.11. David Abbis, author of the report, said it was “encouraging to see that competition for business continues to feed through into the favour of customers in the form of lower fees, but it is noticeable that a number of providers base their set up fee on a percentage of the investment and they may feel some pressure to taper the percentage charged for larger investments”.

As Mr Stevens points out, a SIPP is only suitable for someone “who wants access to a wide range of asset types and investments, who understands that this does not necessarily guarantee a better performance of their pension fund, and whose fund is sufficiently large to ensure that charges associated with the various investment choices are not disproportionately high. Simple pensions invested in insured/mirror funds are perfectly suitable for clients with less complicated needs, or with policies which have lower values.” He goes on to say that there will always be the question as to whether clients who are paying extra fees for the benefit of having a SIPP are using the features that are available to them: “The literature that is presented to clients should make any additional charges clear and advisers should discuss the ongoing suitability of the SIPP with the client at regular intervals.”

Mr Dick agrees that “the main perceived drawback of a SIPP is still cost”, but says this “should only be an issue in the absence of value. Advisers need to be confident that the client wants and needs the features and flexibility offered by a particular plan – the process is no different to assessing the suitability of any other type of pension.” He thinks it is “a misconception that all SIPPs are expensive”. Many SIPP plans “have charges that would be lower than the traditional stakeholder threshold of 1%, but still allow access to a far wider range of investments if and when required”. As is generally well known it is the added functionality and flexibility that are the key attractions of SIPP plans, whether, adds Mr Dick, “it’s the ability to invest in slightly more unusual asset classes such as development land or hotel rooms, or simply the ability to use the client’s own chosen stockbroker or discretionary fund manager to look after their investments”.

Continuing to grow

Regardless of the state of the economy and new higher rate tax rules, there is reason to believe that the SIPP in general – individual and group – will continue to grow. The abundance of investment choice makes SIPPs attractive to those who have the appetite to take control of their investment strategy. As Steve Latto says it “includes a wide variety of funds, equities and bonds as well as more specialist investment options such as the ability to purchase commercial property and the ability to borrow”.

Undoubtedly, SIPP providers face challenges in the near future, not least meeting the requirements of the Financial Services Authority’s retail distribution review, which will, for example, require advisers to give clients greater clarity with regard to remuneration and marketing literature, but the market is well established and, with individuals taking an increasing amount of interest in their retirement options, for the time being the outlook seems rosy.

Allison Plager is a financial journalist; allison.plager@lexisnexis.co.uk