Recent years have been an exciting period for the Self Invested Personal Pension (SIPP) market with plenty of ups and downs.
Back at the start of the decade, SIPPs were seen as a niche vehicle for wealthy individuals, used particularly for commercial property purchase.
All that changed as SIPPs hit the headlines in the run-up to ‘A’ Day and became the subject of much press coverage, following the proposed introduction of regulations that would have allowed residential property and other assets such as wine and art to be held within a SIPP. Along with greater flexibility, this made it look like SIPPs would replace personal pensions as the main retirement savings vehicle in the UK. However, the government changed the rules before implementation, effectively removing the ability for residential property and ‘valuables’ to be held within SIPPs.
But despite these changes to the regulations, many advisers, providers and customers remained switched on to the benefits of SIPPs, namely flexibility, control and choice. This makes them great consolidation vehicles and SIPPs have attracted an increasing share of the pensions market over recent years.
From April 2007 all SIPPs became regulated by the FSA bringing them further into the mainstream.
But what next? Where is the SIPP market likely to head in the future?
Well, there are a number of known opportunities and threats to the SIPP market, and if past experience is any guide, then I suspect there will be some unexpected things around the corner as well.
Opportunity - Protected Rights
From this month (October 2008) it has been possible to hold protected rights (PR) funds within SIPPs. While insured SIPPs have always been able to hold PR money, the Department for Work and Pensions (DWP) had previously been uncomfortable allowing unregulated SIPPs to hold PR money. This changed with the introduction of regulation in April 2007.
There is estimated to be between £75bn and 100bn of PR money and so there is potential for significant business to move into SIPPs. However, a few factors suggest to me that care is required.
Firstly, the FSA has reminded advisers of the need to ensure that any advice to transfer protected rights into SIPPs is appropriate. As with all advised transactions, the FSA expects firms to ensure that any advice around these decisions is suitable and based on an assessment of the customer needs. This would include determining whether there is a genuine need for the investment flexibility and control associated with a SIPP, a clear explanation of the costs involved, and how the recommendation meets the customer’s needs and attitude to risk. There is often significant work involved in finding PR funds and obtaining and understanding the charging structure of the existing plan. The impact, for example, of any transfer out fees, MVRs and transfer in fees, may mean that there is only likely to be significant gain from a move to SIPPs if there is a significant period until retirement or a large PR fund.
Secondly, not all SIPP providers may offer full PR solutions as there are a number of systems issues to overcome in order to hold PR funds. In particular, the PR funds must be separately identifiable from the non-PR funds due to the differing options available at retirement. Some providers may get round this by setting up 2 separate plans (one for PR and one for non-PR) but this could mean 2 sets of charges and make the advice to move more complex. Where a client wishes to contract out going forward (rather than simply transfer existing PR money), there is also a requirement to provide a contracted out comparison illustration.
Threat - FSA Review of SIPP Advice
One of the big threats hanging over the SIPP market is the FSA focus on this area. The FSA is currently undertaking a review to assess the quality of advice on transfers into personal pensions, including SIPPs. The findings of this are expected to be published later this year
It can be very difficult to compare costs under SIPPs with annual fees plus transaction fees, against those for personal pensions which are typically expressed as a % of funds (eg 1% AMC as in typical stakeholder plans). There may also be ‘hidden’ charges in many SIPPs such as fees taken from the interest rate on cash accounts, initial charges on the purchase of certain investments, and fund based renewal fees taken from some mutual funds.
Following its review, the FSA may decide to increase future disclosure requirements for SIPPs to allow greater comparability, and may also question advice already given if customers have not received information allowing them to compare SIPP charges with those for personal and stakeholder pensions.
What lies further ahead?
There’s likely to be more exciting developments in the SIPP market. As volumes of business and regulation increases, we’re likely to see consolidation of providers which will help cover the costs of innovation. And in the current topsy -turvey market, who knows what’s round the corner…
Alison Morris is head of commercial management for retirement income and planning at Scottish WidowsIFAonline
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