We live and work in a heavily regulated environment and with the introduction of RDR it all makes the long standing SIPP versus personal pension (PP) debate more interesting.

As part of the research AJ Bell carries out, Sippcentre advisers are asked to confirm the key drivers for their pension recommendations each year and time and time again the top answers are cost, online functionality and investment flexibility.

Typically at least 90% of advisers will state that cost is the single biggest driver. The starting point for any debate on the use of SIPPs will almost always be the underlying cost. Some will argue that you can achieve the same result in a more cost effective manner, using a traditional PP for example.

Simply stating that SIPPs are expensive when compared to PPs is a little like saying dining in a restaurant is expensive when compared to eating in a local cafe. The starting point in selecting a dining establishment is deciding what to eat and the type of service required. In the same way that there is a choice of restaurant/cafe menu options, with SIPPs and PPs the product can be chosen that offers the investment options, level of service and cost needed.

Of course another point worth emphasising is that no market stands still. In recent years the restaurant trade has seen an explosion in the popularity of establishments offering decent food and efficient service at a price that is often comparable or better than a local cafe. Anyone who has ever had the good fortune to attempt to find a seat in one of the restaurants in the Trafford Centre would attest to this.This explosion in popularity has been matched in some way by an equivalent development in the pensions market, the growth of the low-cost, high functionality SIPP. SIPPs can now be used to build investment solutions which compete head on with PPs and platforms in terms of price. This has been a key driver for their growth.

The market will continue to develop with one of the key influencing factors being the RDR. There may still be the traditional retail funds around today but a new share classes of funds will appear with the likes of institutional priced funds becoming more common. All of this will help advisers reduce the ultimate price of the underlying investment solution. Low cost online SIPPs are ideally placed to deal with all of this change because they allow dealing in these structures today. Personal pensions and many of the longer standing platforms have work to do if they want to play in this wider arena.

If we look at a case study it will become clear why SIPPs will continue to have a major part to play as a mainstream pension solution:

Assumptions:

The important point to focus on here is the impact of the charges in different investment scenarios. Assumptions are based on a male, aged 40, with a transfer value of £100,000 and retirement age of 65. The client is paying a fee direct to the adviser for the advice and initially holds funds in cash

Using the above assumptions the cost of the SIPP wrapper alone can be isolated, which produces a reduction in yield (RIY) of – 0.18%.

The client and adviser are of course in control of all investment, benefit and remuneration decisions and hence the total cost. Assuming investment in UK exchange traded funds, with an average TER of 0.35% pa, and including adviser remuneration of 3% initial plus 0.5% trail there is a natural increase in the RIY to 1.23%.

If a more sophisticated investment solution is considered eg. a range of collectives where the average charge is 1.60% pa, we again see a natural increase in the RIY to 2.04%.

Any future use of facilities such as drawdown will of course introduce additional charges. The client will only be paying for this additional functionality as and when it is introduced to the financial planning scenario. Only by looking at the specific case can you determine the cost and answer any question of suitability.

The increase in SIPP popularity has in many ways mirrored the popularity of platforms. Low cost, online solutions have allowed advisers to build bespoke investment solutions with costs that compete head on with the other pension solutions available in the mainstream market.

The RDR of course throws an additional ingredient into the melting pot. Evolution of the investment solutions that the market will offer must already be considered and adds another important dynamic to the SIPPs vs PP debate.

Gareth James is technical marketing manager at AJ Bell

By Gareth James | Published Feb 20, 2012

Some of you may remember Joint Office Memorandum 58, which clarified the rules for self-investment. It was very basic but also very radical.

The Finance Act 1973 made it possible for controlling directors to join occupational schemes and the small self-administered scheme (SSAS) was effectively created for this purpose.

The main governing document issued in the mid 1970s was Joint Office Memorandum 58, which allowed for investment in commercial properties and also loans to the sponsoring employer as an alternative to investing money in insured funds. 

However, being an occupational scheme, this type of scheme was not available to the self-employed.

Personal pensions

All was about to change in 1987 with the introduction of a consultative document called “Improving the Pensions Choice”, which introduced the concept of personal pensions.

In 1990, the introduction of self-invested personal pensions (SIPPs) created an alternative to SSAS whereby, for the first time, the self-employed could benefit from a SIPP in the same way as a SSAS benefits members of occupational schemes. 

Since then we have experienced a self-invested explosion. SSASs have continued to benefit controlling directors of small companies. SIPPs, however, have grown dramatically after an initial settling-in period to the extent that it is estimated that there are more than 800,000 in existence. Their popularity shows little sign of slowing down.

Adventurous

Why is this so? The answer lies in their flexibility and the ability to control the much wider range of investments which are now available. Acceptable investments for both schemes are diverse and include options and futures, gold bullion, hedge funds and investment trusts.

For the more adventurous, there are teak forests, carbon credits, shares in unquoted companies, overseas commercial property opportunities such as hotel rooms in exotic locations, and many others.

In addition, a SSAS can still make loans to its sponsoring employer of up to 50% of the fund. The loan needs to be secured but at a current minimum interest rate of 1.5% it is considerably more attractive and easier in the current environment than approaching a bank.

If pension contributions are subject to a low return or a falling stock market, self-investment may be an attractive alternative to consider

Read more: http://www.ifaonline.co.uk/ifaonline/opinion/2153766/blog-changing-self-investment#ixzz1n0bZLDBI
IFA Online – News, blogs and analysis for IFAs. Visit the website now.

Article from Darren Philp, Director of policy, National Association of Pension Funds

While quantitative easing is considered essential for the wider economy, it is very strong medicine for defined benefit pension schemes that see their funding positions worsen as gilt yields tumble.

Most affected will be those employers sponsoring DB funds that are due to have their triennial scheme valuation this year, and that will be doing so against a backdrop of suppressed gilt yields and inflated liabilities. The latest Pension Protection fund index figures show that the aggregate deficit of DB schemes in the UK has risen to £265.5bn, from an aggregate surplus of £38.5bn just 12 months ago.

What can the government, the bank, or the Pensions Regulator do to help? The National Association of Pension Funds has put forward a number of options that could help DB funds in this difficult position.

At the most radical end, the regulator could suspend triennial valuations altogether until economic conditions improve, and the bank starts to increase interest rates and sell back assets. This is an unlikely scenario.

More reasonably, the government and the regulator could recognise that very low gilt yields, due to a combination of quantitative easing and wider financial market conditions, will inflate DB liabilities where a discount rate is applied that is based on current market information.

Actively encouraging trustees, actuaries and sponsors to apply discount rates that are more reflective of the longer term would be a positive step.

That could be done this April, when the regulator has said it will set out what it expects of schemes currently going through their valuations.

April’s statement could also usefully strengthen the guidance put out in early 2009, which made sponsors aware that scheme valuations could be updated over the 15 months following the valuation date, known as the certification period, to reflect improving market conditions.

However, given the current economic uncertainty, 15 months may not be long enough. The regulator could consider whether it has flexibility to give schemes a longer grace period before their scheme valuation and any resulting recovery plan becomes binding.

The regulator could also be more sympathetic when signing off recovery plans. The average length of plans is currently between 7.8 and 9.4 years and could be extended further.

However, this approach does not address the underlying problem that the deficit being reported is affected by artificially low gilt yields at the time of the valuation.

One further option would be for the bank and the regulator to issue a joint statement about the distortionary impact of quantitative easing on DB funding. The aim of this statement would be to settle the markets.

Corporate sponsors of DB funds are likely to see their market capitalisation suffer when “news” of rising scheme deficits and challenging recovery plans hits the markets and shareholders get nervous about corporate finances.

The bank publicly extending its acknowledgement of the exceptional circumstances facing the UK economy to recognition of the short-term artificial pressures on sponsors of UK DB plans would be a more coherent approach.

The service will give SIPP providers and independent financial advisors (IFAs) an objective product governance audit trail as part of the distribution of these sort of investments.

Speaking exclusively to OPP this week, Intelligent Partnership managing director Guy Tolhurst said that the new service has been set up in response to a growing wave of concerns from the UK’s government-backed regulator, the Financial Services Authority (FSA).

According to Tolhurst, “there are genuine concerns that advisors have been promoting certain esoteric investments to an unsuitable audience and SIPPs have been targeted as easy money to go after.”

“Many of these esoteric investments are unregulated, meaning the product providers and promoters may be outside of the scope of the FSA.” says Tolhurst.

“As well as monitoring the promoters the FSA is now focusing in on the SIPP Providers, who are very much within their scope, and they are being asked to carry out more detailed and investigative due diligence on the products that they are accepting, as well as ensuring they are reviewed on an on-going basis.”

“For a SIPP Provider it used to be a question of can this product be held with a SIPP under HMRC guidelines without attracting a tax charge whereas now the remit has extended to monitoring the appropriateness of what is transacted through their SIPP.”

And, according to Intelligent Partnership director Peter Robinson, “SIPP providers now have to take more responsibility for product governance … it is no longer acceptable just to verify if an asset is capable of being held within a SIPP under HMRC guidelines.” This is where The SIPP Investment Platform service comes in. “Contracting directly with the SIPP providers, we will carry out detailed due diligence on these products, supporting their own technical and compliance teams with their internal product reviews process,” says Tolhurst.

And “we will compile investment reviews and governance reports that will include our own research, opinions and considerations for the SIPP Provider,” he adds. “We will not, however, be recommending investments or assessing their suitability for investors.  The products will be reviewed and the reports updated on a six-monthly basis”

Gordon Banks, operations director at SIPP Investment Platform adds “once we have completed and compiled our full product governance review, and we are happy to approve the investment, the product in question will be awarded with the company’s SIPP-approved kitemark by way of a licence agreement, renewable in line with the review process.”

“Each report is made available to subscribers within a personalised library on the company website, when downloaded it is given a Unique Identifier Code and is personalised to the subscriber’s company for their own due diligence records and audit trail.”

OPP understands that a SIPP product provider wanting a full “Product Governance Report” will need to pay £2,000 for the report and £895 for the annual review, license and listing on the platform.

“We currently have eight SIPP Providers subscribing to the platform and investment review service,” says Tolhurst, “and there are several more in the pipeline. We also have an advisory panel made up of pension compliance professionals, accountants and lawyers. Where required we can draw on the panel to provide a second or legal opinion on any investment under review”

Guy Tolhurst started Intelligent Partnership in 2007 after eight years of delivering bespoke sales and marketing solutions to international real estate developers, funds, hoteliers and investor groups. The company’s expertise in alternative and pension-based investments means that Intelligent Partnership now raises more than £30million per annum in this sector.

John Moret, known as Mr Sipp, said any regulatory focus on Sipps should not go too far on capital requirements as he believes it could cause many firms to fail.

He said the capital requirements “take no account of the range of investments held or of the level of scrutiny applied to such investments. It also does not really take into account the legal structure of the Sipp business.”

Mr Moret claimed the FSA may consider introducing higher capital requirements on Sipps as it looks to put pressure on those “sailing close to the wind” through the holdings they allow, such as unregulated collective investment schemes.

He also said he would be uncomfortable with any clampdown on Sipps that would push people into small self administered schemes.

He said: “I am very uncomfortable with any suggestion of regulatory arbitrage. That can hardly be in the best interests of the investors. However for businesses that run combined Ssas and Sipp portfolios, the stripping out of Ssas costs and income could reduce the regulatory overhead.”

Stephen Robinson, managing director of Bristol-based Clarke Robinson, said: “I have had clients coming to me with interesting investment propositions in their Sipps. Promoters of Ucis schemes have different rules on promotions.

“There does need to be more control in this area. Whether increasing the capital adequacy will solve the problem is another thing.”

By Marc Shoffman

While a third of those delaying their retirement said it was because they were not ready to quit work yet, the overwhelming majority said they were forced into this position due to their financial situation.

This survey, by the Prudential, comes after annuity rates fell to new lows in recent weeks and concerns that another bout of quantitative easing, as well as fears that new EU rules will push rates still lower.

Twenty years ago a 65-year old man retiring with a £100,000 pension fund would have been able to secure a guaranteed income of over £15,000 a year. Today, with annuity rates at less than 6pc, the same pension fund buys less than £6,000 a year.

At the same time those approaching retirement have been hit with a decade of poor investment returns, while many company’s have scaled back workplace pensions.

However, despite these problems this research showed that early retirement was an aspiration for many, and those “delaying” were often aiming to leave the workforce at 60 – rather than being forced to work into their 70s.

Vince Smith-Hughes, a retirement expert at Prudential, said that the notion of retiring at 60 “was not an entirely outdated idea”. The fact that many of today’s retirees are still planning to leave at this age suggests that the” golden era of retirement for baby boomers isn’t over yet.”

“It’s likely that many of these people will have accumulated benefits in final salary pension schemes that generate an acceptable income in retirement,” he added.

“It is, however, undeniable that there is a new retirement reality for a significant number of retirees. People are living longer, and for many, the very real prospect of a thirty year retirement is either unpalatable or unaffordable, hence the decision by many to continue to work. Retirement is also becoming a more opaque concept, with many people working part-time, either out of necessity or desire.”

Many retirement experts urge individuals to take a more flexible approach to retirement. Billy Burrows, of the advisers Better Retirement Group said this didn’t just apply to moving from full-time to part-time work, before complete retirement, but it also applied to people’s financial options.

Previously most people used their pension fund to buy one guaranteed annuity that paid a fixed income for life.

With rates so low he recommended that those with larger pension funds diversify, splitting their assets between conventional annuities, fixed-term annuities and investment-linked products, that offer some protection against inflation.

Inflation figures published yesterday showed that there had been a slowdown in the rate at which prices are rising. However given energy, petrol and food costs are still rising faster than headline inflation figures, most pensioners experience a far higher rate of inflation than those in other age groups as they spend more of this income on these essential items.

A report published by the National Association of Pension Funds last week argued that “murky pricing” and “sharp practices” in the insurance industry meant many people were failing to secure the best annuity rate.

Mr Smith-Hughes added: “To stand the best chance of having a comfortable retirement, which starts when you want it to, it’s important to seek professional financial advice on saving for a pension and on what post-work income options are available. Saving as much as you can as early as you can will help you to gain more control over your retirement.”

Source : The Telegraph

By Emma Simon

The pension has an annual asset-based fee of 0.25% and can transfer into LV=’s full Sipp, the flexible transitions account, which is charged at the standard fee structure.

Ray Chinn LV= head of pensions, said the provider had reacted to concerns of the FSA that smaller clients were hit by ‘unnecessary’ Sipp charges for investment flexibility they do not need.

‘With regulatory scrutiny on clients incurring unnecessary Sipp charges we are pleased to be able to offer this simple, clear, low cost option within our wider Sipp wrapper,’ said Chinn.

‘We appreciate that some clients want a no-frills, straightforward personal pension, and the wide range of investment funds available means that advisers can easily tailor the plan to suit their client’s risk appetite.’

The pension has access to 130 funds, from 16 fund management groups, including Threadneedle, which offers risk profiled multi manager funds, Fidelity, M&G, Schroders, and State Street, providing a passive investment option.

Held at the Hilton Hotel Park Lane, the event drew all of the brightest stars within the industry and Intelligent Partnership were proud sponsors alongside such companies as Prudential, Investec and Baillie Gifford. Managing Director, Guy Tolhurst personally presented the award for Best SIPP Provider to Standard Life, a company that also collected the award in 2011.

“We were delighted to sponsor what was a very well attended awards evening. Sponsoring the Best SIPP Provider category really resonates with our own day to day business activity as it is voted for by advisers, and through our own activities we hear their feedback on SIPP Providers on a daily basis.  To really open up the category to more entrants, the organisers might want to consider introducing a tier to allow for a greater number of smaller independents to enter going forward.”

The evening was guest hosted by Paul Daniels and his wife Debbie McGee and the revelry continued well into the early hours. Intelligent Partnership would like to thank their own guests from Gallium Fund Solutions, Hutchinson and Co, InvestAG Savills and SIPP Investment Platform, for joining them and making the evening so memorable.

Below is a list of all the winners from the night:

Baillie Gifford Financial Education Award
MeaningfulMoney.tv from Jacksons Wealth Management

Best UK Growth Group
M&G UK

Best Income Group
Invesco Perpetual

Best Global Equities Group
First State Investments

Best Outsourced Investment Solution for Advisers
Skandia

Best New Fund Launch
Vanguard Asset Management

Best Fund Manager over One Year
Hideo Shiozumi with the Legg Mason Japan Equity Fund

Best Fund Manager over Three Years
Deryck Noble-Nesbitt with the Close Special Situations Fund

Best Fund Management Group
Invesco Perpetual

Best Structured Product Provider
Investec Structured Products

Best SIPP Provider
Standard Life

Best Personal Pensions Provider
Scottish Widows

Best Annuity Provider
Just Retirement

Best Wrap/Platform
Skandia

Best Tech/Software Provider
IntelliFlo – Intelligent Office

Best Network/Support Services
SimplyBiz

Best Data and Quotation Provider for Advisory Firms
Assureweb

Best Data and Quotation Provider for Advisory Firms
Avelo

Best Large Adviser Firm
Bestinvest (Brokers)

Best Small Adviser Firm
Old Mill Financial Planning

Paraplanner of the Year
Cathi Harrison, Para-Sols

Investment Adviser of the Year
Bestinvest (Brokers)

Charity Champion
Laura Randall, Monahans Financial Services

Adviser Personality of the Year
Philip Calvert, IFA Life

AMPS, a trade body for Sipp and Ssas providers, has announced that it is forming a platform sub-committee. Chairman Andrew Roberts said AMPS was ‘concerned’ that questions had been raised over Sipp suitability and charges compared to platforms.

The sub-committee will lobby government and the Financial Services Authority (FSA) and will be chaired by Neil MacGillivray (pictured), honorary secretary of AMPS.

Roberts said: ‘With the implementation of the retail distribution review less than 12 months away the platform market looks set to grow considerably and one of the drivers of this will be pensions.

‘As a committee we have become concerned that there has been a great deal of debate on Sipps, their suitability and the charges associated with them. We are forming a sub-committee so that we can benefit from the huge knowledge base and experience of our member firms,’ he said.

The committee will look how platforms are changing pension provision and the effect of platforms on the use of Sipp

Source : New Model Advisor

by William Robins

Investment ‘flexibility’ is a key feature of pensions today but when personal pension plans were introduced in 1988 they were far from flexible with plan holders restricted to funds offered by their product provider.

However, the government had a desire to widen the flexibility and appeal of personal pension provision and the Sipp concept was given the green light by Nigel Lawson in March 1989 to “make it easier for people in personal pension schemes to manage their own investments”. Over time Sipps have become synonymous with flexibility in personal pensions.

The number of Sipps began to grow. By 2008, 633,000 Sipps were in force, according to ABI estimates, and a report by Mintel in 2010 estimated new single premium business had grown by a staggering 679 per cent between 2004 and end of 2009.

Today pension choice is wider than ever, yet Sipps have captured the imagination of advisers and savers more than any other individual pension product.

It is probably true to say that for the majority of clients there will not be a lot of self-investing in a Sipp. So what is the attraction? I think it is down to the simple fact that a Sipp is just a personal pension with a very wide investment choice. Advisers can choose the very best fund managers and add breadth and quality to a client’s total investment portfolio and pension provision.

For many advisers though, it can often be difficult to spot whether the client in front of them should be recommended the flexibility of a Sipp, a low-cost PPP or a stakeholder pension. If your client becomes one of the more affluent members of society you may have to recommend a transfer to a Sipp at a later date. Any advice to transfer a client’s pension from one provider to another has to be shown to be ‘suitable’. In the case of Sipp transfers, investment flexibility and greater control of assets is often cited. And, of course, the suitability report also requires costs to be justified. There is a solution. The additional flexibility of a deferred Sipp – also called a flexible retirement plan or a hybrid Sipp – would enable self-investment at the appropriate time without the need to take out a new plan.

Many in the pensions industry believe there is little scope for consumers with smaller pension pots being able to afford to pay for Sipp advice. However, the Mintel report suggests that, while currently under-represented in the Sipp market, a significant proportion of savers with comparatively low household incomes could eventually build up enough assets to be worth consolidating into a Sipp.

These households would fall into the ‘mass affluent’ sector, which is thought to number around 9m individuals with an impressive £750bn in liquid assets and growing.

Their pension product needs are clearly going to be different to those of the more familiar high net-worth clients. Mass affluent customers are likely to be seeking pension consolidation, inflation beating growth from investments, capital security and lifestyle management. While they may not be looking for a bespoke solution, they do want transparent, flexible, tax-efficient products such as a flexible retirement plan.

The major product providers, aware of the needs of mass affluent customers, introduced flexible retirement plans (hybrid/deferred Sipps) after A-day in 2006. Compared to standard PPP/stakeholder pension/Sipp investment these offer more flexibility, wider fund choice, better value for money, built-in lifestyle options, free switches between funds and additional options (such income drawdown) as well as self-investment.

With a range of investment options that fully meet the needs of the mass affluent investor, the deferred Sipp does not require the client to pay for options and services that they are unlikely to ever need. As a result the cost of a flexible pension will generally be lower than a full Sipp.

A standard stakeholder pension annual management charge is 1.5 per cent for the first 10 years. The fund management charge on a wide choice of insured funds in a flexible pension/deferred Sipp need be no higher. For example – after product charges the flexible pension has 1.2 per cent FMC to ‘spend’ over and above its product AMC to equate to the stakeholder 1.5 per cent AMC, which would allow 150 insured funds to choose from with FMC(s) below 1.2 per cent. Note: these figures are based on a deferred Sipp from L&G, with a £50,000 fund value over a 10-year term, on a nil commission basis. Charges have been rounded to one decimal place.

So extra flexibility = no additional charge (until self-investment is activated).

In addition the costs of self-investment on deferred Sipps are often much lower than the equivalent charges for full Sipps, which are intended to cover more complex investment arrangements.

The ‘typical’ deferred Sipp set-up charge for self investment is £300, compared to a typical full Sipp set up charge = £600. And the ongoing self-investment annual charge is as little as £200 on deferred Sipps compared to a full Sipp annual fee of around £500.

We should not perhaps forget to mention the extra saving of an advice fee for transferring into a Sipp from a PPP/stakeholder = typically £1500 on a £50,000 transfer (3 per cent).

This can add up to quite a saving, assuming a 20-year policy life even with self-investment active over half that time. In summary, a flexible retirement plan offers

• Value for money: more investment choice for the same level of charges as a similar investment in a PPP and, if the self-investment option is not required, lower cost than a full Sipp.

• Low cost: there may not be any establishment and annual charges usually associated with traditional Sipps until customers decide to self-invest

• A wide range of passive investments and actively managed investments: from outset clients choose from insured funds, including property, without triggering the self-investment option.

• Fair charging: clients are only charged for the features of the Sipp that they actually use.

• A range of income withdrawal options to suit your clients’ needs.

• The facility to use income drawdown and phased retirement options as customers approach retirement.

Perhaps flexible retirement plans are the key to unlocking the wealth of an emerging mass affluent sector seeking choice and value for money investment solutions.

Colin Batchelor is head of pensions technical of Legal & General Savings