When a stampede is in progress, a good place to be is away from the dust cloud with a clear view of its progress. This is rather how I feel about the mad rush into Self-Invested Personal Pensions, or SIPPs since the regulatory revolution in pensions from April 2006.
When people, and their advisers, insist that a SIPP is now a must, the first question that springs into my mind is: why?
There certainly was a case for filling your boots under the original proposals, whereby residential property would have been eligible for inclusion within a SIPP product. This was such an off-the-wall scheme that we could only look on in astonishment – and we were not even slightly surprised when the then Chancellor Gordon Brown realised what he was doing and pulled the plug at the last minute.
The inclusion of residential property would have been a magnet for every second-home owner, buy-to-let investor and holiday property owner in the land, especially as a SIPP constructed in this way would have cut capital gains tax liability at a stroke. It would have unrecognisably distorted the property market in the UK and conceivably in UK holiday property markets abroad as well.
However, without that attraction, what are the actual benefits of a SIPP and what is the justification for the billions of pounds that have been, and still are being, ploughed into them?
Certainly, higher contributions can now be paid into Personal Pensions (and hence SIPPs) now, on a par with Occupational Self-Administered Executive Pensions (SSAS), and without the onerous reporting requirements, but this would not alone explain or justify the growth of SIPPs at the level we are seeing.
It could be argued that the current wave of selling is actually just a transfer-in of existing funds – it is not new money.
These existing funds will typically be sitting with somebody who has a collection of pension plans, which are then consolidated into one SIPP vehicle, the oft given purpose being to open up access to hundreds of funds.
It is also incumbent on any adviser to scrupulously carry out due diligence in the consolidation process to avoid the potentially erosive effect of transfer penalties from the existing plans and to ensure that there will be no loss of guaranteed annuity rates or minimum pensions which attach to some of these older plans.
Has there been attention to detail on the other plans? Does anyone really need hundreds of funds? Is it cost-effective given there can be higher charges attaching to management of a SIPP?
Firstly, obviously investors will not need hundreds of funds but more sophisticated and knowledgeable advice may identify say, ten leading fund managers for their diversified portfolio whom they want to follow. Within some older personal pension plans, access is limited to just one or two of their choices and therefore, once you have checked all other detail, you may be will potentially settling second best performance.
So the standard answer is a SIPP widens investment choice and opens up access to the ten fund mangers, which the scheme purchaser really wants. But is this the only answer?
The fact is there are now personal pension plans with open architecture, such as those run by Selestia and other companies with links into a funds network, which give an excellent range of funds but without the SIPP charges. In many cases, the annual management charges are actually less than the existing plans with a smaller range of external funds which do not have the same clout or economies of scale as the fund platform. In other words the open architecture plan will do all you need, at a lower cost.
These open architecture plans will also not charge as highly as SIPPs when you might want to access the plans for Phased Retirement, withdrawals, or make switches within the plan.
So, leaving some plans where they are, moving those that should be moved, and accessing a plan that can give you all the investment you need at much lower cost is actually the real way to be sophisticated with your pension planning.
Some SIPPs, of course, are necessary for other investments, such as fine wines, paintings or boats, but the vast majority of schemes concentrate on traditional investment vehicles. The incidence of purchasers for whom Chateau Petrus is the first priority is very low.
There is no doubt that SIPPs have their place. They can offer more freedom of investment choice, including commercial property, individual shares and other more specialist areas. However, there is no need to pay for this unless, or until, you need to. But the suspicion remains that their current popularity has more to do with the marketing imperatives of some of the biggest players in the business.
This has been fuelled by a sense of kudos among purchasers, who feel it is necessary to have a SIPP because it seems to be the most sophisticated vehicle on the market. But one has to wonder how long it will be before people realise that it’s not particularly sophisticated to pay more than you need to.
Courtesy of Financial Solutions Magazine, January/February 2008.
