Dave White discusses the possible impact the growing SIPP market will have on the personal pension market
Self-invested personal pensions (SIPPs) are becoming the pension of choice for many. So what does this mean for more traditional style personal pensions? To answer this, we need to look at the parallel development of personal pensions and SIPPs to see how both products have developed to meet today's customer needs and those of the future.
Personal pensions were first marketed to individuals in the late eighties and early nineties when the Conservative government allowed individuals to contract out part of the state pension system and make their own pension arrangements. The theory being consumers would be able to take charge of their retirement saving.
However, the major pension providers saw an opportunity to make a quick buck, persuading many individuals to take out personal pensions when they would have been better off in their employers' company scheme. The result was a major pension mis-selling scandal that took much time and money to eventually put right.
The ultimate irony, of course, is that maladministration of the occupational pension regime under a Labour government during the late nineties led to a number of final salary scheme collapses and employees losing benefits in their supposedly secure company schemes. For many, the lesson from both of these scandals is that governments can not be trusted to run pension regimes and self-reliance is a wiser option.
As well as being mis-sold, early personal pensions were often inflexible and expensive products. Investors could not miss a month's contribution and charging structures often seemed to be designed to hide the true costs. Investment was often limited to a provider's own in-house funds, which may not have had particularly good performance records.
In an effort to improve this, the government introduced stakeholder pensions in 2001 with tighter rules on charges and terms, limiting the scope of providers to hide charges through 'smoke and mirrors'. However, stakeholder pensions were not sold in large numbers, as the life office/financial adviser distribution model for selling individual pensions relied upon commissions incentivising the adviser to sell; with sufficient scope over charging for life offices to recoup the cost of the initial commissions.
The result of all this is that in the personal pension market, customers tend to feel uncomfortable about the product, the provider and where it is invested. Consequently, regular premium and single premium contributions to personal pensions have fallen away quite dramatically.
Growth in SIPP sales
While the fortunes of personal pensions have languished, SIPP sales have steadily grown over roughly the same period. Initially life offices ignored the promising SIPP market, seeing little point in a product that did not automatically lead to investment in their own fund. However, this highlights one of the key attractions of a SIPP, the separation of the administration of the pension and the underlying investments. The SIPP provider runs the pension itself but the client and their adviser chooses how to invest it from the full range of HM Revenue and Customs approved investments.
With SIPPs becoming more popular among mass affluent and high net worth investors, life offices are marketing their own SIPPs, or 'SIPP-lite' products. Whereas a traditional, full SIPP has a set list of fees for establishment costs, annual administration and other services, life office 'SIPPs' may apply indirect charging structures which make it hard to see where the charges are levied.
Under a true SIPP, charges are transparent and can be cost-effective. For example, if a SIPP has a fixed annual management fee of £450 a year and no other charges, this is equivalent to a stakeholder annual charge of 1.5% once the pension fund is worth £30,000. As the fund increases above this, the percentage paid in fees falls. This explains why SIPPs can be such a good deal for those with larger pension funds.
The SIPP market is now developing and as well as full SIPPs, investors can now choose lower charge SIPPs with a narrower range of assets. The beauty of a full SIPP is that it allows investment in direct securities, commercial property, unlisted shares and other esoteric investments, as well as collective funds, but some investors may wish to start with a smaller investment range and work upwards.
Care should be taken to ensure that there are no restrictions and no penalties if, at a later date, the investor wants to widen their investment portfolio. With life office SIPPs, this may not be possible, as commercial considerations dictate what may be held by investors.
At the same time, investors should ensure that their SIPP is a product for life, by ensuring that it allows all options in the post-retirement phase. This includes income drawdown, alternatively secured pension and scheme pension, as investors need to have the freedom to find the best solution for their personal circumstances.
As the baby boomer generation retires over the next 20 years, they will want as much freedom and transparency as possible in their pensions and this is where SIPPs score over personal pensions.
Personal pensions face another threat from this October, when holders of protected rights will be able to self-invest them with a SIPP, rather than having to keep them in a life office fund with a personal pension, as has been the case in the past. The old protected rights regime gave life offices a captive market of around £100bn and this is now up for grabs.
For many individuals, the idea of consolidating their protected rights in the same fund as their SIPP will undoubtedly be attractive as a way of reducing charges and applying a single investment approach to all pension assets. At the same time, no doubt many individuals will be glad to escape the clutches of the large insurers that they associate with poor investment performance, poor administration, high charges and mis-selling scandals.
At present, personal pensions have a place as the starting point for many in making retirement provision. But from 2012, when personal accounts are introduced, it is possible we will see them becoming the simplest and cheapest pension on offer, with SIPPs meeting the needs of those who want to take more control over their retirement savings.
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