Colin Maloney, head of pensions at Jupiter, is wary of the excitement surrounding A-Day. Although it will present many opportunities to the industry, investors should be cautious of investing any old assets into their Sipp as it needs to have appropriate holdings to fund retirement
A-Day has dominated many news pages over recent weeks but much of the coverage has centred on rather dramatic issues such as the new freedom of investment rules. Usually, the broadening of investment options is cause for celebration but, in this particular instance, I believe it may be a case of the emperor's new clothes.
Under the current rules, personal pension investors can only put into their pension what a life company (or other provider) has on offer, which usually amounts to an in-house managed fund or a limited number of external funds. Not often an inspiring choice. Alternatively, they can buy a Sipp, which allows them to put in other assets such as commercial property, in addition to the funds they - not the provider - have chosen.
Making the right choice
From 6 April 2006, the rules will change to allow investors to put any number of different investments, from racehorses to paintings to wine, into their Sipp. Recently I discovered that someone was planning to put a zoo they own into their Sipp and this troubles me.
When deciding what to put into their Sipp, investors should always ask three questions: how much is an asset likely to appreciate; how much could I possibly lose; and how liquid is it? If an investment falls short on any on these, it should be reconsidered.
Of the new Sipp investment options, residential property has arguably attracted the most attention, mainly due to its performance over the last few years. But - despite it being the most sensible new option - it qualifies for pension inclusion on only two counts: its potential appreciation and low risk profile. In terms of liquidity, it falls flat on its face.
Wine? There is an argument to say that people who have jobs that revolve around a Sipp-friendly asset will benefit from the legislation. So, a wine dealer could, for instance, put a cellar-full of claret into his or her Sipp. But the trouble is - uncertain tax position apart - that the price of wine is notoriously volatile. Therefore it should not, in my view, have a place in a pension that is designed to fund a lengthy retirement.
Similarly, an art dealer could put paintings into a Sipp, but if there is fast rotation in and out it would soon attract the unwanted attention of the Inland Revenue, which would clamp down on what it would view as trading.
In fact, all the new options have major drawbacks and none can satisfactorily answer the three investment questions. Unlike most of these more novel investment options, unit trusts remain the ideal solution and they do not require storage space, nor can they be damaged by a leaky roof or a house fire. The other options are certainly different and profile-raising but pensions are fundamentally dull because they need to be.
The good news
What people should be focusing on is the new opportunities A-Day creates in other areas. Of all the new rules, I think two stand out. The first involves increased contributions. From next April, investors will be able to put 100% of their earnings into a pension in any one year. Clearly, this would be an unwise option for anyone planning to eat or pay their bills, but it does mean there will be tremendous scope for investors - particularly mid-to-high earners - to make significant lump-sum payments.
For instance, someone earning £100,000 with £60,000 in a building society account could move the £60,000 into a personal pension and reclaim basic rate tax (while paying virtually no higher rate tax). Essentially, this means they will have contributed almost £77,000 to their pension pot for a net cost of around £46,000. I would argue that this is a much better way of using that £60,000 than letting it languish in a low interest savings account.
The other, perhaps slightly less significant, area worthy of attention is concurrence. At the moment, employees who are already members of a company pension scheme are not permitted to contribute to a personal pension. From A-Day onwards, however, they will be able to have both. The prime beneficiaries will be the middle earners, particularly married couples in company schemes, as concurrence enables them to maximise their savings if one of them plans to stop work, perhaps to start a family.
But it will also provide a major fillip to the savings industry, as companies will no longer have to turn away customers simply because they have an occupational scheme. In fact, A-Day could potentially break life companies' stranglehold on pensions provision if fund management groups decide - as I think many will - to develop pensions products for the mass market. We keenly await the new regulations on changing the permitted provider rules, which could remove the final barrier to entry for many fund groups.
Simple pension products will not be the only growth area post-A-Day, however. Despite their rather peripheral new rules, Sipps are very well placed to benefit from the liberalised regime. Due to their flexibility, Sipps are already very popular but it is far from inconceivable that the market could mushroom from its current size of £20bn to £100bn within five years. Much of this is likely to be 'refugee' money as thousands of disgruntled with-profits and managed fund investors flee underperforming life companies in search of superior returns and greater choice.
Many of them, I suspect, will eventually switch into multi-manager funds, which are a very suitable alternative to with-profits and managed funds. The switching process can only be helped by highly regarded experts such as Ned Cazalet championing the cause of multi-manager, which he - and others - have been doing. Nevertheless, I doubt a seismic shift will happen overnight. People remain wary of putting all their assets into one place - in this instance a Sipp - despite the fact that their money will be invested with a host of different managers.
Once this educational hurdle has been overcome, however, I think we will see a major change in the way people save for their retirement. A-Day presents huge opportunities for the industry and it is up to us to take advantage of them.
Partner Insight: For Blackfinch, the arrival of its IHT portfolio services was a 'natural evolution' in the group's offering and points to an established track record of returning cash to investors.
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