SIPPs were not an instant success

Self-Invested Personal Pensions have now started to attract a following. They are not for everybody but are certainly worth considering
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The Independent Online

They say what goes around comes around, so it should not have been surprising that, having written about the problems of generating income from a portfolio last week, I should be asked to speak at a conference dealing with - you guessed it - the problems of generating income from a pension.

They say what goes around comes around, so it should not have been surprising that, having written about the problems of generating income from a portfolio last week, I should be asked to speak at a conference dealing with - you guessed it - the problems of generating income from a pension.

It was the fifth annual conference on Self-Invested Personal Pensions and Income Drawdown. Needless to say, income plays a very important part in these circumstances - not least because of the paltry returns that annuities currently deliver. A more creative approach was needed, according to one actuary on the platform. But before I tell you more about what was said, I should explain exactly what a Self-Invested Personal Pension, or SIPP, is.

It was Chancellor Nigel Lawson who first created the environment which allowed the introduction of SIPPs. In 1989 he announced he wished to make it easier for people in personal pension schemes to make their own investments. Later that year the guidelines were issued and the first SIPP was launched in March 1990. They were not an instant success.

Until then personal pensions had largely been the province of insurance companies. SIPPs provided a means of unbundling the investment management - using an insurance company wrapper to ensure all pension scheme legislation was properly followed, but allowing individuals to manage their investments themselves or use a specialist fund management house, even if they did not have an appropriate pension product.

The initial lack of interest was put down to insufficient understanding, a problem that still exists, in my view. Even so, a few extra changes to the way in which pensions operate in the personal market are leading people to realise that in SIPPs there may be an idea worth pursuing.

The collapse of annuity rates, itself largely a cause of government pensions legislation in the aftermath of the Maxwell scandal, and the introduction of income drawdown made a more transparent, flexible pension seem much more attractive. Annuity rates more than halved with the introduction of the Minimum Funding Requirement, making pension providers match their liabilities with assets. In these circumstances the ability to take an income from a portfolio results in less return being given up. Indeed, the whole point of annuities is you surrender the capital to the insurance company. At least with a SIPP there is a capital asset, which could be handed on to your spouse or to the next generation.

And so SIPPs started to attract a following, with growth of more that 40 per cent in 1999 over the previous year. Indeed, the SIPP Provider Group confidently forecasts a tenfold increase in the number of holders to half a million people over the course of the next decade. This is an optimistic claim but one considered eminently achievable by the group chairman, John Moret, who is also managing director of Personal Pensions Management Ltd, one of the principal SIPP administrators.

SIPPs are not for everybody, but their flexibility, greater transparency and clear benefits in the event of death make them worth considering for anyone in a defined contribution scheme or, perhaps, having deferred pension benefits. Pensions are likely to retain their importance for this government. Rumours reach me of the imminent launch of an Individual Pensions Account, described as a working man's SIPP. Or perhaps a spin doctor merely feels "stakeholder" has Transylvanian overtones.

Brian Tora is chairman of the Greig Middleton Investment Strategy Committee

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