David Prosser: Concentrate on the best bit of Sipps
Saturday 10 December 2005
Gordon Brown's last-minute u-turn on plans to allow pension savers to invest in residential property and exotic assets has infuriated companies that have spent millions preparing for the reform. But while their anger is understandable, the changes to the pension rules that will still go ahead next April are far more valuable. Despite the hype, property investment would have only been possible for a handful of very well-off savers.
Forget all the nonsense about holiday homes abroad, or the investment value of classic cars. The best thing about April's reforms has always been that they will give more pension savers access to decent investment funds. This aspect of the reforms should finally sound the death knell for the hopelessly mediocre pension products punted out by some of Britain's biggest life insurers.
When personal pensions first came along, courtesy of the Conservative government in 1988, these insurers embarked on a feeding frenzy. Cashing in on a government advertising campaign stressing the advantages of taking personal control of your retirement planning rather than relying on your employer, the pensions industry launched products featuring a dizzying array of charges almost guaranteed to ruin your chances of decent returns.
This sorry state of affairs continued until regulators finally realised savers were being ripped off. The disclosure rules introduced in the late nineties - which forced pension providers to explain charges - and the launch of low-cost stakeholder pensions in 2001 has forced life insurers to clean up their act.
Yet one huge con remains. Billions of pounds of savers' pension contributions go straight into investment funds run by large life insurers. Year after year, these funds have produced sub-standard investment performance. And many charge substantially over the odds.
A £1,000 investment made five years ago in the average UK stock market-invested personal pension fund is today worth £919 - the money would have been worth £1,010 had it been invested directly in the stock market.
Most pension savers have no idea how badly their money is being invested. Pension fund performance statistics are only ever published in specialist publications, and while insurers must provide regular updates, savers have no way of knowing whether or not they are getting good value.
From April, however, almost all savers will have access to low-cost Sipps, as the pension simplification rules make it easier for providers to offer the plans. The big advantage of Sipps is that savers are not restricted to the funds run by the insurer administering the plans. Instead, you can opt for your contributions to go into mainstream unit and investment trusts.
There is nothing magical about these funds. But crucially, the unit and investment trust industries are far more transparent - performance statistics are now published in every national newspaper.
Also, competition in this industry is much fiercer. As a result, average performance is better - £1,000 invested in the typical unit trust five years ago is now worth £972, almost 6 per cent more than the average pension fund. Pick the right funds and you can really outperform. The best pension fund is at just £1,263 over five years, compared to the £1,836 generated by Rathbone UK Special Situations, the top unit trust.
Who knows what savers might have earned from property held in a pension,fine wine or art. The important thing is not to be put off by the chancellor's u-turn - from next April, most savers will have access to a genuinely better deal.
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