Self-invested personal pension plans offer staff more investment choice and greater control, says Tom Washington
The popularity of group self-invested personal pension plans (Sipps) has risen steadily over the past few years. Much like other occupational pension schemes, group Sipps are individual contracts that allow staff to save for retirement in a tax-efficient way, but it is the product’s flexibility that is behind its true appeal.
Sipps received a boost in April 2006 when pensions simplification legislation came into effect, under which the government widened the investment options available through a Sipp. Unlike trust- and contract-based pension schemes, which only allow members to invest cash, employees belonging to a Sipp can make a wide range of investments, subject to certain HM Revenue & Customs restrictions. Investment possibilities include stocks and shares, commercial property, hedge funds and private equity.
Philip Hutchinson, head of corporate Sipp sales at Pointon York Sipp Solutions, says there are several ways employers can incorporate a group Sipp into their pensions provision. It can either be used to replace an existing occupational pension scheme, or introduced alongside an existing scheme to offer employees a choice.
Also, employers could permit staff to contribute to both a group Sipp and another occupational pension scheme. “A corporate Sipp can act as a recruitment and retention tool, especially among more discerning employees who desire a higher degree of control over their investment,” says Hutchinson.
Regulation around Sipps has also been greatly relaxed since 2006’s simplification legislation came into effect. There are now minimal restrictions on contributing to a Sipp and employer contributions no longer count towards the member’s annual tax free investment limit of £235k.
Sipps are regulated by the Financial Services Authority and are often used as a tax-efficient vehicle for employees who want to invest maturing share options into their retirement savings, rather than keeping or selling them. An employee in a share incentive plan (Sip) can move their shares into a Sipp when the scheme matures, tax-free, while an employee in a maturing sharesave scheme can do so with only capital gains tax to pay.
The tax breaks available through Sipps are significant and, for some employers, running a group Sipp may be cheaper than offering a stakeholder pension or group personal pension. Tony Filbin, MD of corporate wealth at Legal & General, says there is a false perception in the marketplace that group Sipps are more expensive than other types of defined contribution pension schemes.
If employee contributions are made through a salary-sacrifice arrangement, the tax savings can help to fund the scheme. Staff receive full personal tax relief of up to 40% on all contributions made, depending on which tax bracket they are in, and their Sipp is also exempt from capital gains tax if it grows in value.
Group Sipp providers charge for their products with either a per capita fee or a fee based on a percentage of the funds under management. Charges will be affected by the type of organisation, annual management costs, transactional charges, and fees for specialist investments like property.
Not all investment options will be suitable for all employees, so employers can also opt to give staff access to a web platform to find what they want. Using such technology, employees can manage their retirement savings at the click of a mouse, making their investment options more accessible and relevant.
“We are finding there is more member engagement in this type of arrangement,” says Filbin. “Many employees have seen pension contributions as a cost rather than a perk but now, with an ability to control and a wider choice, they are seeing it as a benefit.”
Product file: Group SIPPS
What are group Sipps?
Group self-invested personal pensions operate in the same way as other occupational pension schemes, but offer a wider range of investment choices and give members greater control. Employees can roll shares from matured employee share plans into a Sipp tax-efficiently.
Where can employers get more information?
More information can be found at the Financial Services Authority’s site: www.moneymadeclear.fsa.gov.uk/products/pensions/types/self-invested_personal_pensions.html; or www.employeebenefits.co.uk
Who are the main providers in the market?
Axa, Hargreaves Lansdown, JP Morgan, Legal & General, Norwich Union, Origen, Pointon York Sipp Solutions, Prudential, Punter Southall, and Standard Life