Pensions made for people who love being in control
Sipps have thrived by letting customers make their own investment choices. Are you bold enough to buy one? asks Julian Knight
Sunday 27 July 2008
Some people might think of pensions as boring. Others might view them as inflexible or expensive. Others still, influenced by mis-selling scandals, would call them untrustworthy. But the growing sales of self-invested personal pensions suggest that, to these buyers at least, they're none of the above.
As the name suggests, Sipps are DIY pensions where savers have a very wide choice in where their cash goes. They can buy and sell investment funds, company shares, bonds or even commercial property and keep them in their pension fund. The choice is 100 per cent the investor's; with a standard pension fund, the provider makes the investment decisions.
At a time when people are increasingly sceptical about the returns generated by conventional pension plans, Sipps have their appeal. "The market is currently growing by around 50 per cent a year," says Tom McPhail, head of pensions at independent financial adviser Hargreaves Lansdown, which offers its own Sipp. "People like the idea of being in control of their own destiny rather than signing it over to some faceless insurance firm.
"Sipps are easy to administer too. With some of the plans, savers can see what investments they hold and buy and sell online. This gives them a real sense of ownership."
The Sipps market may also be given a shot in the arm from October when savers will be allowed to transfer contracted-out national insurance contributions into the plans.
Contracting out is a complex and at times controversial area. What it boils down to is that instead of building up entitlement to the state second pension, an individual will transfer the money out of the state system and into a personal or workplace plan, with the aim of generating a bigger retirement income.
However, this doesn't always work out for the best and many customers have been told by their pension firms that they would be better off returning to the state system. Nevertheless, a lot of money is still contracted out and, because of October's rule change, it could soon find its way into Sipp accounts.
"Up until now, the Government has not wanted the billions of contracted-out money going into Sipps, because the area was unregulated," Mr McPhail explains. "But with the advent of Financial Services Authority regulation, the Government's attitude has relaxed and people will be able to transfer money from other pension schemes into their Sipp."
However, not all is rosy in the Sipp garden. For one thing, some providers levy an upfront set up fee that can be as high as £500. And annual charges can be higher than the cheapest personal pensions. Sipp providers also levy transaction charges, so each time you buy or sell an investment held within the plan, you pay.
Above all else, the saver has to live with the consequences of their investment decisions; they can just as easily lose as win. Even savers with the knowledge, experience and sheer nerve to undertake a DIY pension successfully may not have the time and the patience.
"Some people think of Sipps as a bit sexy – a way to be in control," says Michael Rudge, UK managing director of pensions company The Hartford.
"But that requires lots of hard work and what often happens is that after the initial burst of enthusiasm, investors leave the money they have paid in untouched.
"Sipps have their place but it's limited. To suggest that in a few years they will supersede standard pensions is a non-starter."
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