Self-invested personal pensions have faced a boom in growth as individuals look to take charge of their own investments, but the offering might not be right for all employees, says Ceri Jones
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Sipps have taken off as charges have fallen back in line with group personal pension plans. They are widely seen as the pension plan of choice owing to their investment flexibility. Plans can be tailored to an entire workforce or sit on top of an existing plan.
The myriad of investment choices on offer can bring its own problems, however. Employers need to think through who controls the investment, for example, whether it is the member or their adviser, and how the process works.
Sipps are attractive because they are a tax haven for shares arising from share option plans.
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The Government’s last minute U-turn prohibiting Self-invested personal pensions (Sipps) from investing in residential property did one thing – it put the enormous investment flexibility of the product firmly on the map.
It also came at a time when many people were looking to take charge of their own investments and to sample a wider range of options, and coincided with a wave of negative media coverage for both personal pensions and final salary plans.
Steve Osbiston, regional director of Baker Tilly Financial Services, says: "Clients are keen to take control of their investments. They might look at alternatives such as property, having been burned by equities in the early part of the century."
Tom McPhail, head of pensions research at independent financial adviser Hargreaves Lansdown, which had 8,000 individual Sipp clients at the end of 2005, but now has 25,000, says: "The market is growing very, very fast." The group side, he says, is a slower burn, but he expects it to be just as big.
The government’s determination to slash stakeholder charges has also had a knock-on effect. Today the cost of a group Sipp more or less equates to a group personal pension (GPP).
"Appetite [for Sipps] has also been driven by improvements in technology. It’s the first time anyone has been able to run a sophisticated investment over the net, offering a thousand fund choices, in a way that is instantly accessible to individuals and their advisers," says McPhail. Most Sipp implementations by employers to date have been small in scale. "It works well for 10 or 1,000 people," he adds.
Employers tend to use Sipps as an additional benefit to attract and retain senior staff, but others offer them to new recruits, even if occupational arrangements are in place for the workforce.
It is possible to opt to restrict investment to insured funds at the outset and to later extend the choice of investments when staff are ready. In this way, a single scheme can be appropriate for staff across all tiers of the workforce.
A group Sipp, as a collection of individual Sipp contracts taken out with one provider, has similar legal status to a GPP, and none of the corporate risks of a trust-based plan.
For some members, however, the wide range of fund choices can be confusing. As well as the large number of funds on offer, Sipps sometimes include alternative asset classes such as private equity and hedge funds. Like any money purchase scheme, employee dissatisfaction could rebound on the employer if an investment performs poorly.
Duncan Howorth, managing director of Jardine Lloyd Thompson Benefit Solutions, says: "The question is whether you need something as complicated and as expensive as a Sipp for most employees."
He believes there are two lessons for employers to take onboard when setting up a Sipp. Firstly, he says the product should not be imposed on staff because the fund choice can be too dazzling, and secondly, employers should ensure employees take advice around the options and fund selection.
The market has also been slow to grasp some of the benefits of Sipps. Schemes can be a useful home for company shares obtained through share option plans. Shares transferred to a Sipp are tied up until retirement, but effectively enjoy double tax relief and are free of capital gains tax when sold, while dealing with just one destination facilitates employers’ administration processes. What is less well understood is that a similar transfer could be made with any share portfolio staff already own.
For investors seeking the widest possible investment choice, one alternative is a small self-administered scheme, which now share the same tax rules as Sipps but differ in the investments permitted. Unlike Sipps, these can make loans to a sponsoring employer, but ownership of shares in the employer is limited to 5% of total assets in the scheme, whereas there is no limit in a Sipp. Members of a small self-administered scheme also have greater freedom to buy property without the approval of a scheme administrator. For small-business owners, these advantages could be critical, but come with the drawback of having to undertake all administration in-house.
And from this month, Sipps will be regulated by the Financial Services Authority, which will lend them further credibility.