Feature – Focus on Pensions: The debate over Sipp and GPP

The burgeoning culture of financial self-direction is no better illustrated than by the debate raging between the cost-orientated Sipp and the GPP, says Ceri Jones

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• The cost of self-invested personal pensions (Sipps) is falling into line with group personal pensions (GPPs).
• Publicity around residential property and assets for Sipps may make GPPs appear old-fashioned.
• Initially, Sipps are likely to be top-end, and may run in tandem with other schemes.
• Sipps will not accept protected rights, so other provisions will have to be made for staff who contract out.

Group self-invested personal pensions (Sipps) are not new; they have long had the potential to confer huge advantages over group personal pensions (GPPs). However, owing to the massive publicity surrounding pensions simplification, the investment flexibility of the Sipp is becoming more widely appreciated. In practice, most Sipps will not invest in residential property, but the opportunity has captured the public imagination just at a time when there is a growing culture of financial self-direction.

In comparison, pensions restricted to unitised funds will look a poor relation post A-day, particularly as trust in insurance companies is at a low ebb. Neither is it just about the freedom to invest in residential property, and assets like wine and art.

For a public fast becoming accustomed to the immediacy of internet banking, the inability to make instantaneous fund switches under a GPP arrangement may also appear archaic. GPP holders are generally limited to two or three switches per year, but a Sipp holder can switch at will, even moving into cash in a difficult market.

Sipps have become competitive only recently, however. Providers such as Hargreaves Lansdown, AJBell and Killik now offer Sipps at the same cost as a personal pension. Sipps linked to funds supermarkets – which allows investors to purchase a range of funds from a single source – can cost less than a stakeholder plan, and enjoy the open architecture demanded by clients who expect to monitor their arrangements online. For employers and administrators, further efficiencies may arise from straight-through inputting.

From the independent financial advisers’ viewpoint, monitoring a range of markedly different portfolios and getting everyone to agree to the investment principles will be difficult. Sipps will therefore be more prevalent at the high end of the market. There is already an enthusiastic market in partners in accountancy, legal and surveying firms banding together to buy commercial property.

Fergus Lyons, adviser at AJBell, says: “Large portfolios may not fit neatly into a group personal pension, so choice as funds mature is an issue.” Simple two-tier arrangements would be easy to manufacture. A fund supermarket-based plan could offer senior staff a greater range of specialist funds at the flick of a switch. A group Sipp could also be used as a top-up to final salary schemes for senior executives who may be worried about the £25,000 cap on protected benefits from the Pension Protection Fund.

Jan Regnart, managing director of James Hay, says: “I do think this is a big opportunity, particularly for employers of under-funded final salary schemes. Top executives are savvy and would see such a scheme as a partial protection.”

Members of final salary schemes with generous increases to pensions in payment might also choose to draw all their income initially from a Sipp top-up plan.

Self-investment plans are a more natural fit with job mobility, and the alternatively secured option, releasing pensioners from the requirement to buy an annuity at 75, will prove attractive.

The only significant drawback to Sipps is that they cannot accept protected rights, despite hard lobbying by the pensions industry. Tom McPhail, head of pensions research at Hargreaves Lansdown, points out: “It’s an awkward distortion, creating administrative and communications difficulties for the employer, which will be forced to run two schemes.”