Managing your own retirement fund may sound tricky, but the numbers of people
buying self-invested personal pensions (Sipps) has exploded over the past 12
months.
Before the Government’s radical reform of the pension system on April 6 last
year — dubbed A-Day — there were thought to be about 50,000 Sipp holders in
the UK. Estimates now put the figure anywhere between 150,000 and 250,000.
One leading Sipp provider, A J Bell, says that contributions into its Sipps
rose from £20 million in March last year to £131 million this year.
Tom McPhail, head of pensions research at Hargreaves Lansdown, the independent
financial adviser (IFA), says: “The past year has been a huge growth period
for the Sipp industry. We are rapidly getting to a point at which Sipps are
going from being an additional feature to a must-have option when you sell a
personal pension.”
But is a Sipp really a must-have? Or are too many savers being encouraged to
purchase a product that is not appropriate for their needs?
Malcolm Cuthbert, managing director of financial planning at Killik & Co,
another IFA, gives warning: “Sipps are not suitable for everyone and it is
absolutely vital that people take expert advice. Some may be better off with
a personal pension or a stakeholder plan.”
Mr Cuthbert says that savers should be wary of purchasing execution-only Sipps
with no investment advice. “These are excellent for well-informed and
experienced investors,” he says. “But they are definitely not a pensions
panacea.”
Already, the Financial Services Authority (FSA), which began regulating Sipps
on April 6 this year, has warned providers about problems with the marketing
of these pension plans, saying that there was a lack of balance in some
literature, where the possible risks and disadvantages of Sipps were not
mentioned, and that some firms were encouraging transfers into Sipps but
failing to mention that not all transfers are suitable.
But Andy Bell, managing director of A J Bell, says that the most vociferous
critics of the Sipp boom have been the companies that stand to lose out —
traditional pension providers. “All people are doing is voting with their
feet,” he says. “They are deciding that expensive and poorly performing
insurance company pensions are not for them. Most Sipp products stand up to
far greater scrutiny on charges than personal pensions.”
Indeed, the boom in the Sipp market has taken place as their charges have
plummeted. Before A-Day, Sipps were seen as expensive products suitable only
for those with relatively large pension funds, but many providers are now
offering low-cost Sipps. Overall Sipp charges have fallen by 13 per cent
over the past year, according to a survey from Defaqto. Its report shows
that the average set-up fee on an initial investment of £50,000 has fallen
from £306 to £266. However, more than a quarter of Sipps now charge no
set-up fees at all.
“The issue of cost is complex,” Mr McPhail says, pointing out that it is no
longer the case that a stakeholder pension will necessarily work out cheaper
than a Sipp. “A stakeholder pension plan can charge up to 1.5 per cent a
year, but it is possible to get a Sipp with no set-up fee and no annual
management charge, and to opt for a fund, such as the Schroder balanced
managed fund, that charges only 0.8 per cent annually.”
Nor do you have to be a high-earner to open a Sipp, as was previously the
case.
Hargreaves Lansdown, for example, allows monthly contributions from only £50
and lump-sum contributions of £1,000, although the company says that the
average lump-sum investment of its clients is £15,000.
A large pension fund is no longer a prerequisite either. Mr Bell says:
“Because you can now get Sipps with no fixed costs, it is nonsense to say
that you need a pension fund of £250,000 to have one.”
However, he admits that the average size of his clients’ pension funds is
between £70,000 and £80,000, which is more than double the national average.
Given falling charges and lower contribution limits, should we all be opting
for Sipps? “If you want to give your money to someone, forget all about it
and then come back 30 years later to collect your pension, then a Sipp is
not for you,” says Mr McPhail.
He believes that stakeholder pensions — the simple, low-cost plans introduced
by the Government in 2001 — are already on their way out and are likely to
be replaced with personal accounts when these are introduced some time after
2012. In the meantime, however, stakeholder plans do have a role to play for
some savers. “If you want complete simplicity in your pension arrangements,
you will probably be more comfortable with a stakeholder,” he says.
Choosing the type of pension that is right for you is no longer about wealth
or fund size. Mr Bell says: “It is more a state of mind. If you want to take
control of your investments and understand the basics of investing, then you
ought to choose a Sipp.”
However, he adds that savers must be prepared to spend more time on their
pension planning than if they were opting for a stakeholder, or a personal
pension plan. “Every three to six months you need to spend a bit of time
doing some research, looking at your funds and rebalancing your portfolio,”
Mr Bell says.
CASE STUDY: Taking control
Martin Walker has more pensions than most, but that didn’t stop him from
adding to his collection last year when he discovered the greater choice
offered by Sipps.
The solicitor from Telford, who already had a local government pension, a
personal pension, a further personal pension taken out when he contracted
out of Serps and membership of a group personal pension, says: “I am 47 now,
so the more money I can put into a pension the better.
“I had been investing in Isas through Hargreaves Lansdown for a few years and
they pointed out that I could get greater flexibility and a wider choice of
funds if I invested through a Sipp.”
Though aware of the risks of running his own portfolio, Mr Walker has built up
a relatively adventurous portfolio of funds, including Fidelity Special
Situations, Neptune’s Russia fund and Jupiter’s China fund. He also holds
Invesco Perpetual’s pension fund and the Hargreaves Lansdown multimanager
special situations trust.
Mr Walker is happy to stick with funds — rather than picking the stocks
himself — for the time being and says: “I have tended to shy away from
shares. I hold a couple of stocks in banks, which I received when some
building societies demutualised, but in general I tend to focus on unit
trusts.”
