The introduction of Sipps in 1989 opened up opportunities throughout the pensions market and could displace the traditional personal pension policy for many
Self-invested personal pensions (Sipps) look like becoming the vogue personal investment vehicle of the twenty-first century and could displace the traditional personal pension policy for many.
The introduction of Sipps in 1989 opened up opportunities in most areas of the personal savings market. Until then, individual pensions were almost exclusively the preserve of insurance companies and personal/executive pension plans.
Self-invested pensions, and Sipps in particular, are causing clients to look more closely at how their pension funds and other free assets held outside any pension arrangements are managed. As with the financial planning of asset management, it is important that investment management also looks at the whole picture to ensure that a client's aims can be properly met.
The unacknowledged wealth of the average client was the first step in the revolutionary process. At the end of the millennium, a typical client probably had far more by way of capital assets than they realised ' some Peps, Isas, maybe a portfolio of stocks and other assets such as property and cash. This could amount to some £200,000 to £300,000 in total.
In the past, there has been a tendency to look at each investment wrapper separately, without regard for the whole picture. As a result, clients may have ended up with an investment risk profile that is different from their real requirement.
Clients have often collected personal pension policies using different insurance companies and fund strategies. The introduction of Sipps provides an alternative that allows them to bring together all of these various funds into a single pension vehicle so they can adopt a cohesive investment strategy. It has become obvious to many that this approach should equally take into account non-pension assets.
Clients who have gone down this road often find their real wealth is greater than they realise and that bundling together their future pension requirements and general wealth management is an important feature.
This cues the next step in this process. Considering the existence of the average client's larger than anticipated asset base, what is now lacking is a cohesive investment strategy that takes into account the sprawl of these assets. This is where independent advisers come into the picture.
Traditionally, advisers acted for large insurance companies when advising clients about pensions as they had few, if any, alternatives to offer. They were the link between the companies and their products, often based in London, and the mass of clients located outside the City.
Self-invested pensions broke the mould because clients liked the concept and the flexibility it offered, so advisers were able to respond accordingly. Sipps separate the roles of pension provider and investment manager. The rise of such a product has given many intermediaries the opportunity to make contact with professional investment managers for the first time.
Since 1989, advisers have been able to make choices and concentrate on financial planning in order to cater for the ever-increasing complexity of financial services, leaving investment management to specialists. As a result, independent advisers turned for advice and service to specialist investment managers. This has completed a radical cycle of change for advisers that, to some extent, has reoriented them away from insurance companies towards specialist pension and investment management providers, a move that has proved mutually beneficial.
A client's introduction to an investment manager through a self-invested pension may often lead to that manager also looking after the client's personal investments. Equally, for an independent financial adviser, a Sipp may be the first introduction to an investment manager, opening doors to other services whose availability was not immediately obvious.
Attractive though these extra benefits may be, there is a third step in the process. In what is a remarkable change in the role investment managers have historically played, it is now possible to offer a highly personalised service to Sipp clients using investment managers spread around the UK.
reversal of roles
In the past, investment managers and stockbrokers were seen as offering a service only to those perceived as rich, while the insurance market was seen as open to everyone. The definition of rich has changed and the roles are now reversed. The insurance world is seen as shackled by rigidities but current capacity in modern investment houses is such that they can cater for a clientele with a much lower capital base.
For all practical purposes, this constitutes the nub of the self-invested personal pension revolution.
At Morgan Stanley Quilter, we concentrate on offering a truly personalised service. This is important in a world where impersonal responses are almost the order of the day. We can remodel the portfolio and organise switches within the sector to suit the client. We produce a half-yearly report and offer genuine access to the investment manager, where there is a real facility to organise the portfolio on a structured basis.
This means that, as the client moves towards critical events such as retirement (even if, at an early stage in the investment management/client relationship, that seems like a remote prospect), the portfolio can be adjusted smoothly and appropriately. It can be genuinely structured with real planning taking place.
Income drawdown, for example, ceases to be the testing conundrum in terms of portfolio adjustment that it normally is because income requirements can be anticipated in advance and calculated accordingly.
Generally, Sipps are best suited to clients with at least £100,000 or more to invest. A more modest pension investment, or involvement in an executive pension plan, has until recently left only an insurance policy as an alternative pension planning vehicle. However, individual pension accounts (IPAs) are intended to be available to all forms of approved pension arrangements.
In effect, they will operate more like a bank account than a policy because there is no underlying contractual arrangement; just a facility that is available to make long-term pension contributions when funds are available.
With all the changes that have taken place or are in the process of happening in the pensions arena, the pensions and investment market will continue to be a dynamic place. It will be interesting to see which providers are able to move forward and work successfully in this ever more complex area.
Generally, Sipps are best suited to clients with at least £100,000 to invest.
Sipps separate the roles of pension provider and investment manager.
Within a Sipp, income requirements can be anticipated in advance and calculated accordingly.
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