Pension campaigners had reason to celebrate at the end of this year as the Government gave a £12.5bn pledge to 140,000 people who lost their savings in occupational pension schemes.
The long-awaited move followed outcry at the £25bn the Bank of England threw at Northern Rock to secure customer deposits while it left pension savers in the cold.
Secretary of State for Work and Pensions Peter Hain gave a welcome Christmas present when he announced Financial Assistance Scheme (FAS) help for those affected for 90% of their accrued pension and extended the settlement to cover 11,000 people in schemes wound up by qualifying solvent employers.
However, the Government has seemed to give with one hand and take with the other this year on pensions as the pre-budget report (PBR) in October detailed plans to slam pension funds handed to family as inheritance with 82% tax.
Actuarial consultancy Punter Southall called Gordon Brown’s u-turn on surplus pension tax policy, which industry commentators previously expected to come in line with inheritance tax (IHT), “disproportionate”.
The Pensions Bill has also failed to satisfy the industry with its personal accounts plans set for roll-out next year. There are fears employers might level down their contributions to the 3% minimum and criticism there is currently no exemption conditions for existing workplace pension schemes.
“The result is that employers will have to continually monitor whether their scheme is exempt for some, all, or none of their workers, and will probably just therefore throw their arms in the air and join personal accounts,” says Hargreaves Lansdown.
The provider’s concerns include questions on how investors will access their money in personal accounts and if the Government will treat employees who have chosen not to enrol in their workplace scheme as exempt or not. It worries personal accounts could become “the black hole that sucks the living soul out of the existing pension system”.
However, there has been good news too and the industry welcomed last week’s plans to allow protected rights (pension funds built up from National Insurance rebates when contracting-out of the state second pension) in SIPPs from next October.
The move follows industry estimates that about £100bn sits in protected rights and research from Suffolk Life which shows up to 50% of new SIPP business has attached protected rights. The provider also estimates existing SIPP clients hold between £15bn and £20bn in protected rights, which it anticipates could move into SIPPs in the next couple of years.
The research also shows 60% of advisers claim they would use self-invested protected rights for at least half of their clients if it became more widely available. John Moret, director of sales and marketing at Suffolk Life, says his customers’ average protected rights funds have reached £60,000 and has even seen protected rights investments of more than £1m.
“[It] seems to confirm the estimate this market is sizeable and the self-invested facility could have a big positive impact on the SIPPs market overall,” he says.
This year, the SIPPs market had a boost to business following the A-Day changes to allow occupational scheme members to invest outside their employer’s scheme. A survey by Fidelity FundsNetwork earlier this month shows 56% of advisers believe the changes have increased business.
The average SIPP size has also grown, according to research by SIPP provider Hornbuckle Mitchell in June. The research shows A-Day changes increased the average size of a full SIPP with specialist providers to £430,000, compared to about £200,000 five years ago.
However, figures from James Hay in November show women have yet to sign up for SIPPs as they account for just 15% of the provider’s SIPP sales. The provider guesses women’s pension pots, which it says probably remain in occupational pension schemes, have not caught up with men’s.
James Hay’s accounts also show a growing trend towards younger investors buying online SIPPs as figures from October show online SIPP investors have an average age of almost 45, compared to the average traditional SIPP holders at almost 55.
This year the growth of the middle-market SIPP client has continued, according to Suffolk Life. Moret, who defines the middle-market as the target investor of life companies, which may restrict investments, says this client’s growing SIPP awareness has led to more than 25% growth in sales and says we could see sales growth approach 30% in 2008.
The only potential dampener to the market he sees next year comes from the FSA’s thematic review on suitability and advice, which could raise concerns about advice quality and commission levels, damaging the reputation of SIPPs.
The SIPPs market has generated such demand this year that the products have overshadowed conventional annuities, suggested research by MetLife in June. A survey of 100 advisers showed almost nine out of 10 noticed the trend, spurred on by a growing awareness of flexible retirement products, particularly since A-Day.
However, Rachel Vahey head of pensions development at Aegon, disagrees SIPPs have taken over annuities in the popularity stakes. She believes annuities will remain the biggest selling retirement product next year, although she recognises the need for flexibility. The market will react next year to consumer demand and offer that flexibility, she adds.
This year, hybrid annuities, which combine annuity and income drawdown features, and 5 for life products, which offer similar advantages in a bond, have attracted lots of attention. Last month, Aegon won an innovation award for its 5 for life product, which uses a bond to offer similar advantages to a hybrid annuity, following its September 2006 launch.
Research by life assurance provider Lincoln Financial Group in June showed three in four advisers believe their clients would consider the US-style annuities despite the Government claiming the products would create tax complications and only benefit the minority.
Kim Lerche-Thomsen, chief executive of Living Time, disagrees. He says: “The truth is that ‘hybrid’ or ‘middle market’ retirement income products, far from being applicable to a narrow section of the population, have a wide appeal and in a few years could become the mainstream solution for those in retirement.”
Whether the Government will again reverse its decision regarding hybrids remains uncertain. What does finally seem certain in the pensions universe comes in the shape of the Resolution and Pearl merger. After a six-month battle Resolution agreed on a £4.9bn takeover with the insurer, beating competition from Friends Provident and Standard Life. Resolution and Pearl expect the deal to complete in February…we shall see.
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