Individual Pension Accounts provide small pension investors with a flexible savings plan. The success of the scheme, however, could be hindered by a lack of Government and pensions specialist action
On 6 April this year, Statutory Instrument 2001/0117 introduced the individual pension account (IPA), which has the potential to offer far greater flexibility to the smaller pension investor and continue the pension sector's revolution set in motion some 12 years ago by self-invested personal pensions (Sipps).
To date, Sipps have pulled in some £15bn of UK savings and this figure might well double quite rapidly. But IPAs could do even better because the potential market is so huge. IPAs should appeal to anyone in the UK considering taking out a personal or executive pension policy.
Some now say that there could even be a statutory requirement on employers and others to make IPAs available to all within an approved pension arrangement. So, the resonances from this statutory instrument could be felt for many years to come.
The essence of the IPA concept is its flexibility. It is not an approved pension in its own right, as personal and executive pension schemes are, but is rather a pension investment account written under an approved pension arrangement.
Unlike a pension policy, a person's IPA can transfer from pension scheme to scheme and can receive pension contributions from different types of pension arrangements (both occupational and personal) at the same time.
This concept of flexi-saving marks a decisive break with past ideas of what constitutes a pension arrangement. An insurance policy, for example, can only be issued for one type of pension scheme and can generally only invest in the issuing insurance company's range of pension funds. IPAs are not shackled by this inflexibility.
Apart from their pension flexibility, they can invest directly into collectives such as unit trusts, investment trusts, Oeics and gilts.
Interestingly, insurance company unit-linked pension funds are not mentioned as a permitted investment within the statutory instrument. While this investment range is not as extensive as that of Sipps, which can also invest in direct equities and commercial property, IPAs can give the freedom of self-investment to a far larger number of people than have it at present.
The diversity of collective investments currently available in the marketplace should cater for the needs of most investors.
In fact, many insurance companies already use these same collectives to enhance the range of pension funds they offer through their pension policies. The investment diversification within a single collective means that there is no reason why initial contributions to an IPA should not be as low as between £50 and £100 a month. As the fund size grows, the investor will be able to increase the number of holdings within the account.
Looking at the whole concept from a slightly different angle, the average investor normally believes that the pension policy is the pension itself. This is actually not the case: the route is more complex.
Personal and executive pension schemes are governed by a trust deed and rules and these are the key documents in any approved pension arrangement. The role of the policy itself is simply to act as an investment vehicle giving access to the insurance company's range of funds.
Under the IPA set up, this historic route alters considerably and so too does the emphasis within the overall structure. All that is needed to set up an IPA is a trust deed and rules that have been approved by the Inland Revenue, a suitable pensions administration system, plus an investment manager, who could be the investor or an appointed third-party manager.
As with Sipps, IPAs unbundle the services used to run a pension and the public will be able to pick and choose their pensions administrator and investment manager separately, based on the quality of service on offer.
Should the quality of service become unacceptable, then one or both of the service providers can be changed without any need to surrender or make the IPA paid up, as is the case with most pension policies. In the case of most policies, surrender or making paid up usually involves some form of penalty or cost for the investor.
With this flexibility, it is possible to envisage a person setting up an IPA at the start of their working life and taking this account wherever their careers may lead them. Changes of employer, moving from employed to self-employed or vice versa, and contributing via different types of pension arrangements would make no difference ' the investor would still only have one pension account.
Statutory Instrument 117 does require that the different sources of pension contribution within the IPA are kept track of, but at least all the investor's pension money would be in one place and far easier to keep a track of than is currently the case.
Many investors who move from job to job throughout their working lives can end up with many small amounts of pensions in various forms. It is easy to lose track of these benefits, which collectively over time may add up to a substantial total retirement benefit. While current legislation does allow for the transfer of past pension benefits to other pension arrangements, the transfer decision-making process is complex and usually requires expert advice.
The reason that the Government has introduced IPAs to the UK savings market is almost certainly on the back of the success of 401K in the US and Sipps in the UK. However, Sipps, which are usually costed on a fixed cash charge basis, are generally more suited to those with larger pension funds ' £100,000 is the commonly quoted figure. Providing greater choice to the smaller pension investor in an area where traditionally insurance-backed products enjoy a virtual monopoly may have been an important motivation behind the Government's initiative.
The reported mis-selling of individual pensions by the insurance industry, with all the subsequent damage to sentiment, may also have given Government a further prod. Given this unfavourable background, and the Equitable Life affair will not have helped improve matters, the Government may well have seen IPAs as constituting a fresh start for the savings sector and one that does not require the insurance companies' involvement. No government of whatever persuasion can afford to see the public put off the idea of saving for retirement, given the growing and ultimately intolerable pressures in future decades on social security budgets.
We will have to wait and see whether IPAs are able to fulfil their potential. It may well depend upon the willingness of specialist pensions administrators and investment houses to put together the necessary services to run and promote IPAs to the public.
What does seem a shame, and what may stunt the future growth of these accounts, is that the Government did not take the opportunity to make them a stand-alone pension vehicle ' that is, a sort of retirement Isa.
It should not be too difficult to come up with a fairly simple set of rules to govern such an investment vehicle and thus, free them from the burden of the increasingly complex and confusing pension rules and regulations that we currently have in this country.
The Government must be careful that the very complexity of the UK pension's regime is not putting the public off the idea of saving for retirement.
The essence of the IPA concept is its flexibility.
IPAs can invest directly into collectives such as unit trusts.
All that is needed to set up an IPA is a trust deed and rules approved by the Inland Revenue.
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