Picture the scene: you walk into work, switch on the computer and find an email from your employer telling you the occupational pension scheme you have been saving into for a number of years will be shut imminently and your money will be transferred to a scheme you know nothing about. It's a discomforting scenario, but one that is happening to many workers as firms try to reduce their administration costs by ditching their old pension schemes and starting up a group self-invested personal pension (Sipp) instead.
Standard Life, one of the UK's biggest pension providers, reported a 60 per cent increase in group Sipps being set up last year alone. Among big-name companies now offering group Sipps are BT and Centrica. And this month travel reservation website Expedia went a step further and said it would ditch its standard pension in favour of one of these Sipps.
At first glance, a shift away from standard workplace pensions to a Sipp seem a good thing for employees; they offer more choice and control over where savers' cash actually goes. Instead of paying a fund manager to make decisions, each individual investing in a Sipp is in charge of his or her own pot of money, and any cash their employers choose to contribute. They are free to buy more exotic assets than just plain old shares such as commercial property or government bonds.
However, with flexibility and choice comes the risk that scheme members will make the wrong investment decisions, potentially scuppering the prospect of a decent retirement income. "For the majority of the population, it is debatable whether the additional choice and flexibility are needed as there are sufficient asset strategy options already available under a standard workplace pension," said Nigel Frankland from pensions consultants Punter Southall. "Staff who have little appetite or who do not understand the more esoteric investment options available would not be particularly well suited to a group Sipp." In particular, Mr Frankland fears for employees with small funds or those approaching retirement investing in risky assets that could potentially result in substantial or irreplaceable losses.
Likewise, Andrew Tully from pensions provider Standard Life said that those savers with smaller funds had to be careful not to get carried away with all the investment options open to them through a Sipp, veering away if they can from riskier investments but towards safer assets such as cash and bonds.
"For many people with smaller funds, the additional risk involved – and possibly the need for investment advice – in these investments may not be appropriate," Mr Tully said.
"If people invest in more exotic elements such as commercial property, directly into equities or use a discretionary fund manager, then there are extra charges which apply. Some of the additional costs are also fixed amounts, eg surveyor fees and valuation costs, and so may have a proportionately higher impact on smaller funds," he said.
Paul Goodwin, the head of pensions at Aviva, echoed this view, adding that the expanded investment options could even serve to put some employees off. "Employers may end up paying more for additional flexibility that they don't need, and the increased complexity may reduce employee engagement in pension saving," he said.
If you find that you're offered the option of moving your pension cash to a group Sipp, then Mr Frankland suggests that you check the small print to ensure that your employer will still continue to make contributions as the same rate as under a standard workplace pension. In other words, make certain that the employer is not trying to get away with paying lower contributions than was the case in the past.
Mr Frankland adds that workers need to ask their employers who pays for the financial advice that will be necessary to manage a Sipp correctly. When you reach retirement, what help will you receive in choosing the right annuity to pay an income?
For some employees, namely those who are members of a company share incentive plan, there are potential tax benefits to be had as long as they hold these shares in a Sipp. "If you are holding matured shares, you will be paying tax on the dividends at the highest rate of income tax and you can be subject to capital gains tax when you sell the shares. If you are holding it within a pension scheme (such as a group Sipp), then you won't be subject to capital gains tax," said Tony Philbin, the managing director of workplace savings at Legal & General.
Comments