The future is bright for the self-invested personal pensions market as online investing booms, the new stakeholder system begins and the trend moves towards defined contribution pension provision, writes Mike Morrison
In the 1989 Budget, the then Chancellor of the Exchequer Nigel Lawson announced that he wanted to make it easier for individuals to manage their own personal pension funds. The result was Joint Office Memorandum 101 in 1989 and the development of Sipps (self-invested personal pensions). Memorandum 101 set out a list of investments in which personal pensions could invest and allows investment portfolios to be set up that are tailored to an individual's needs.
Investment flexibility with a wide range of permitted investments has been key to the success of Sipps. This has been clarified by the Personal Pension Schemes (restriction on discretion to approve) (permitted investments) Regulations 2001, which came into force on 6 April 2001.
These new regulations defined a Sipp and also set out the Inland Revenue's definitive list of Sipp permitted investments and clarified some of the restrictions. The most important point is that we do now have an agreed list emphasising that investment choice is key.
Over the last decade, there has been a definite move from defined benefit pension provision to defined contribution pension provision. The effect of this has been to amplify the effect of investment performance on the ultimate level of pension that is provided. We are now in a world where the importance of investment performance is paramount with the actual type of pension plan nothing more than a tax-advantaged wrapper.
Investment awareness is higher than ever and we have in recent years enjoyed relatively good market returns. As such, the time has been right for the development of Sipps and specialist providers have emerged with sophisticated products.
Driving market forward
More specifically, there have been developments in the pensions world such as income drawdown, which have driven the Sipp market forward by necessity. The whole point of income drawdown is to manage a portfolio to provide a specific income as required by the client, in line with that client's risk/reward profile. Hence we are back to the importance of active investment management.
A number of other more nebulous factors may well have helped the Sipp market, not least the growing dissatisfaction with inflexible contracts offered by some of the traditional pension providers and the inconsistency of many investment managers.
So where do we go over the next ten years? There are a number of factors that would seem to suggest that Sipps should go from strength to strength, not least those previously mentioned.
Another factor that could really assist the Sipp market is the potential removal of the compulsion to purchase an annuity at age 75. Any extension to the current income drawdown regime would reiterate the need for investment flexibility and in such circumstances, a Sipp would probably be essential to give maximum opportunity and flexibility of investment.
Also positive for the future of Sipps is the growth in online investment dealing services. Such facilities are really starting to take off with access to investment markets becoming easier and, perhaps more importantly, less costly. It will be interesting to see whether current market volatility dampens demand in this area.
Surprisingly though, one of the biggest opportunities may come with what was considered not so long ago to be one of the greatest threats ' the new stakeholder regime. If, as many advisers anticipate, the market for traditional personal pensions is squeezed by stakeholder, then it is likely that many advisers will move towards more 'advice based' products such as Sipps and income drawdown.
By its very nature (and charging constraints), stakeholder is unlikely to be able to offer a wide range of investment choice. This may not be a problem for low levels of contribution but I am sure that not all stakeholder pensions will remain at this level.
As stakeholder fund values grow, clients will presumably seek greater investment opportunities and flexibility, which cannot be provided within the 1% charge cap. At this stage, a Sipp may become a more viable solution. Any higher charges may be easier to accept with a higher fund.
The regulatory regime around stakeholder now puts the onus on the adviser to justify offering a traditional personal pension or a Sipp instead of a stakeholder pension. In reality, I do not think that this will be a problem as the added value that investment choice can bring to a pension plan can be immense.
Extended investment choice, particularly under a Sipp, does mean a need for specific professional advice and this in turn means advisers who move towards this market can add real value to the choice and ongoing management of pension plans.
One of the criticisms that has been levelled at Sipps is that they are elitist and really only for sophisticated investors with very large amounts in their pension plan. I think that this is now being dispelled. A Sipp can be a large portfolio managed by a stockbroker, but it is more likely that it will be a portfolio of collective investments (unit trusts or investment trusts) or even just a basket of trustee investment plans from a variety of different companies. Diversity does not necessarily mean complexity and added value can be obtained by something as simple as choosing a selection of trustee investments.
Another area of Sipp investment that must not be forgotten is the ability to buy commercial property. This may prove particularly attractive to small limited companies or partnerships that can then occupy the building and in effect pay rent back into their own pension fund. There are the usual pros and cons of such a transaction however. Again professional advice is essential.
So the future for Sipps does look bright for all parties concerned. The investment opportunities available can mean real potential for investors to increase their level of retirement income and the added value of advising on such plans can mean a real niche for financial advisers in this market.
Investment flexibility has been key to the success of Sipps.
The move from DB to DC pensions has amplified effect of investment performance on ultimate pension.
Developments in the pension world have driven Sipps sector.
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