From Cradle to Later Life, SIPPs Offer a Lifetime Solution

             

 

 

Francis Moore considers the pension regime and discusses why those seeking to take advantage could be attracted by the flexibility and freedom provided by a SIPP

 

Pension Planning always raises a number of questions – how to find the right scheme, what to invest in and how to draw benefits. There is much to consider and making the wrong decisions can have a life-changing impact.

For some the Self-Invested Personal Pension (SIPP) is the answer – But what is a SIPP, how does it differ from a personal pension and is it right for everyone?

There are between 1.1 and 1.5 million SIPPs in the UK worth approximately £150 billion.   Their growth has been driven by their flexibility and tax reliefs compared with other financial products such as ISAs, savings schemes and personal pensions. Recent pension reforms have increased interest in pensions and some observers predict a doubling of the SIPP market by 2020.

However, SIPPs are still dwarfed by Individual Savings Accounts (ISAs) of which there are over 20 million with assets combining both cash and stock/shares ISAs of over £500 billion.*

Occupational pensions account for some £2 trillion of assets being added to by auto-enrolment schemes.**

SIPPs too are set to benefit from those in occupational pension schemes looking for more retirement flexibility and wider investment options previously known as Free-Standing Additional Voluntary Contributions (FSAVC).   Also, poor performing legacy insurance company pensions are also increasingly being transferred to SIPPs to consolidate fragmented smaller pensions, reduce costs, and offer wider investment choice.

A SIPP is a personal pension plan ‘with attitude’ that enables the holder to choose and manage their investments or choose and replace investments and managers without having to change the SIPP.   In other regards it meets standard personal pension plan rules. The first SIPP was created in 1990, and historically SIPPS were held by higher value investors.   However as the market develops, the efficiencies of SIPPs are enabling those with smaller funds to participate too.

A SIPP is not for everyone but member-directed investment can be attractive for those with time and knowledge as it allows greater pension freedom (the essence of the new pension reforms) both for savers and for those drawing benefits.

 

A SIPP therefore offers the facility of:

• Saving for retirement from cradle to later life
• Contributions to be made by the member, guardian or employer (subject to annual HMRC maximum contribution limits).
• Self-investment where the member makes their own investment decisions (with or without the support of independent advice) and selects investments suitable for their risk appetite which may change during their lifetime.

 

 

Anyone considering self-investment should consider their appetite for risk, time scales and objectives as well as market conditions.

Investment in equities peaked in the 90s where after focus on investment for pensions increasingly turned to fixed interest investment – initially UK gilts, then bonds and sovereign debt.

This was largely driven by institutional investors looking for a ‘safer’ path for investors, followed by private investors through personal choice or through adviser recommendation.

Current volatile equity performance and low gilt and bond yields has seen investors looking for higher returns to provide a regular income or offer an under-pin of more defined growth fuel the development of alternative markets.

Nevertheless when devising an investment strategy it is likely some of the more ‘traditional’ investments as listed below will also be considered:

 

• UK shares
• Overseas shares
• Government securities
• Listed Bonds
• Unit Trusts
• Investment Trusts
• Insurance Company Funds
• Discretionary managed funds
• Deposit Accounts
• National Savings Products
• Gold
• Exchange Traded Funds and Exchange Traded Commodities
• Commercial Property

 

In addition a SIPP may offer to more high net worth and sophisticated members assets such as:-

 

• Unlisted Securities and funds
• Private company shares

 

These investments are complex and costly to administer and increasingly the SIPP industry is pulling back from more esoteric options. Because of the 2% of a typical SIPP portfolio capital adequacy requirement required by the Financial Conduct Authority for non-standard investments and the increased risk of fraud many providers and customers do not see merit in these potential investments.

An interesting recent development for those looking for income is the emergence of Peer to Peer  (P2P) lending or alternatively listed bonds issued against the book of P2P loans; however, few SIPP providers are currently able to accept these ‘alternative investments’.

A SIPP should evolve as the investors’ needs change from a low cost SIPP or ‘vanilla’ plan to the more sophisticated plans which allow greater investment choice and encourage greater pension freedom but also in the knowledge that where appropriate it is possible to scale back all within the same SIPP plan.

At each stage of pension planning the same criteria however should be considered before taking action – charges; investment choice; SIPP provider.

 

 

Each of these can have a significant effect on how the pension performs and its suitability for the investor.  As an example of this – a SIPP may either be charged on a fixed cost or ad valorem basis (ie % of value) which can have a marked impact, dependent on plan value, as a fixed cost on a smaller plan value can represent a far higher % cost to value.   That said, according to many leading economists, for higher value funds ad valorem costs can be detrimental to wealth creation.

Equally, low cost SIPPs may typically restrict investment choice to Cash Deposits; Index Funds and ETFs (Exchange Traded Funds).

The choice of SIPP provider is also key as it undertakes the regulation which governs UK Pensions, ensuring the SIPP complies, and undertakes collection of tax reclaims, processes income payments and administration in the event of death.

 

Other issues for consideration include:

 

• Customer service
• Use of technology to manage the account
• Ease of communication
• Clarity of literature and documentation
• Speed of response
• Investment choice
• Any additional charges

 

When the time comes for drawing benefits the recent pension reforms introduced new and different ways to achieve this from age 55 onward.

No longer is retirement a ‘single point’ event in life.

Whilst there is still the option of a guaranteed income for life from an annuity, with current levels of interest rates the annuity market has lost some of its support and investors have been keen to take advantage of the new freedoms and possibly even combine options.

From 6th April 2015 have had full access to their pension savings and with no necessity to take any or all the benefits from the pension scheme at any time. Available options are:

 

• Take up to the full value of the pension plan in one go – 25% is paid out as a tax-free lump sum, with the remainder as a taxable income payment;

 

• Take 25% of the pension as a tax-free payment and as much or as little as required as a regular income from the remainder;

 

• Take smaller lump sums, known as an Uncrystallised Funds Lump Sum Payment (UFPLS) made up of 25% tax-free cash and 75% taxable income;

 

• Purchase an annuity and take up to 25% as a tax-free lump sum and set up a regular guaranteed income from the residual pension fund.

 

• Residual pension funds being left for beneficiaries either tax free or, in later life taxed, removing a key consumer concern about annuities.

 

 

A SIPP  opens up a range of options for all age groups with differing needs such as: investing for children by parents, grandparents or guardians; for longer term growth with investment flexibility; for pension consolidation; for flexibility in retirement and for passing on wealth to the family.

 

But there are also disadvantages to be taken into account such as:

 

• The risk of making investments decisions
• Costs can be expensive for low value SIPPS unless the right plan is chosen
• SIPPS can be deemed to be complex
• The potential for fraud and pension liberation
• The potential for mis-selling of SIPP plans which are unsuitable
• The risk of choosing the wrong benefit option unless the individual takes professional advice

 

In summary, therefore, in the right circumstances SIPPS can provide a lifetime solution but may not be appropriate for everyone.

Remember, investments are risk-based and their value and any income generated can fall as well as rise.   For those where individual choice is key, the SIPP market remains positive but please bear in mind not all investments that can be held within a SIPP have the protection of the Financial Services Compensation Scheme (FSCS) and where there is any uncertainty about a financial services product or an investment, professional advice should be sought from a suitably qualified and authorised financial adviser.

This article has been produced for generic information purposes only and does not constitute advice. It should not be relied on in making any decision and you should check that any product you invest in is suitable to your specific circumstances.
 

 

 

Sources:

 

*    HMRC ISA Stats

** The Pension Regulator