John Moret gives his views on the results of the SIPP inquiry
The results of the Retirement Planner SIPP inquiry which confirm the continuing growth in demand for SIPPs should come as no surprise. Recent surveys have all confirmed that the rate of growth in the SIPP market continues to exceed 20% per annum.
Just what constitutes a SIPP continues to provoke some debate. Historically a SIPP has been seen as a rather exclusive individual pension savings vehicle for the wealthy. The survey confirms that although the average amount invested per client in a SIPP remains high there are now many clients with funds of less than £200,000 where a SIPP has been recommended. This is not entirely surprising particularly given the increasing activity of insurance companies in this sector.
This segment which I've labelled the hybrid sector has been the fastest growing segment over the last five or six years. It has also been the segment which has provoked most debate - with some critics arguing that many of the plans reported as SIPPs are nothing more than personal pensions dressed up legally to represent a SIPP. These arguments have increased in intensity following the regulation of SIPPs partly as a result of the FSA comments in their adviser newsletter in March 2007 in which they said: "We are already monitoring closely the provision of advice on SIPPs and are having discussions with a limited number of firms to further inform ourselves of market practices. We require firms to treat their customers fairly. Advice to switch into SIPPs should be suitable - reflecting the customers' needs, priorities and circumstances - and not influenced by commission payments".
The issue of suitability is a complex one but now that all SIPPs, for regulatory purposes, are deemed to be packaged products all advisers need to heed the clear warning in the above statement. It is clear from the responses to the questions on regulation in the survey that some advisers are concerned about the potential for mis-selling and it is also somewhat worrying that over 15% of those responding felt they were not prepared for the new regulatory framework.
The future shape of the SIPP market
There were some interesting perspectives on the future shape of the SIPP market with many advisers anticipating an increase in mergers and activities among operators with smaller providers being forced out of the market. This is in line with our view that the increased regulatory overhead both in terms of solvency requirements and the implicit costs of compliance with a "packaged product" regime will over time lead to a rationalisation in the market.
The biggest impact is likely to be at the "bespoke" end of the market which is already arguably overcrowded with suppliers. In this segment the quality of service delivery will remain all important. As a sponsor of this survey we were able to pose our own questions one of which was the importance of the availability of online services. The replies demonstrate very clearly where advisers feel that real value can be added both for themselves and their clients. The need for SIPP operators to be able to provide online valuations and transaction histories is very clear - any operator that is unable to do this is likely to find it very difficult to sustain a position in this market.
We also asked about the use of discretionary management services within SIPPs and discovered that just under two-thirds of advisers use or have used such facilities. This is a rather higher proportion than we had anticipated. Similarly we were surprised that over half the advisers surveyed felt it was important that a panel of discretionary investment managers was available as part of a SIPP proposition. I suspect that some advisers have been influenced by the offerings of some insurance company SIPP providers where a "panel" had become almost a mandatory feature.
One encouraging trend in the survey responses was the number of advisers prepared to deal with the apparent increase in interest in holding commercial property as an investment within a SIPP. Although there were fears that the reduction in gearing levels as a result of the A-Day changes might have had a negative impact on the demand in our experience this appears not to be the case.
We have also seen a number of other positive developments as a result of the new simplified pensions tax regime introduced in April 2006 particularly in the context of contributions and unsecured and alternatively secured pensions. Compared with the twelve month period ending in April 2006 total contributions received in the tax year 2006/07 were up by over 300% with an increase of over a third in the number of investors contributing. There were some very substantial contributions made with over 300 personal contributions of over £100,000 and 153 employer contributions including several in excess of the annual allowance of £215,000.
We also experienced an increase of over 200% in investors using the new unsecured income provisions although interestingly over 30% elected not to take any income and instead took some or all of their lump sum entitlement. We also had a handful of investors who elected to use alternatively secured pension (ASP) although unsurprisingly in the light of tax changes demand for this facility has waned.
What comes through loud and clear from the survey findings is that SIPPs are here to stay. It remains to be seen whether the rates of growth experienced in the past will continue. There are many external influences at work that will shape the future including the FSA's retail review, the impact of wrap platforms, the potential introduction of the second tier "Pension Accounts" and the accelerating demise of defined benefit schemes. What is clear is that SIPPs can provide real value to advisers and their clients but that to simply replicate the features of the traditional individual products is not the key to unlocking the many benefits that SIPPs can bring.
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