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What are do-it-yourself pensions?
| by Andrea Page 01 Apr 2003 Topic: Pensions, Personal Finance |
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As more final salary schemes are wound up and with-profits funds cut investment returns, dwindling public confidence is prompting more people in the UK to consider the DIY or 'self-invested personal pension'. Andrea Page writes As a concept, self-invested personal pensions (Sipps) aren't new, but the UK Sipp Provider Group has estimated the market is growing by over 20% a year. 'Sipps are suiting a lot of insurance company orphans,' says Fergus Lyons, commercial director at provider Sippdeal. 'Equitable Life is still a major factor.' Although pension transfers are driving the market, providers expect more people to choose Sipps as their key retirement savings vehicle in future. Sipps are similar to personal pensions in that your contributions earn tax relief and are subject to certain limits. Assets grow free of UK income and capital gains tax, except for deductions at source, and benefits can be drawn between the age of 50 and 75. Providers include pensions administrators, insurance companies and stockbrokers. Unlike standard personal pensions, the individual Sipp investor controls what goes into the Sipp. Investment choice is broader too, including futures and options, traded endowment policies and commercial property (but not residential property, commodities and unquoted shares). You can combine assets or hold separate Sipps, subject to overall contribution limits. 'You have an individual fund, and you can see what you've put in and how it's performed,' says Fergus Lyons. 'The other important thing in this market is the ability at a click to go into cash.' Some 45% of its Sipp clients' assets are currently liquid. 'People like the control Sipps give them,' adds Henry Catchpole, managing director of provider Suffolk Life. 'They can pursue a very specific strategy.' Commercial property features in around a third of schemes administered by Pointon York Sipp Solutions. 'Accountancy practices haven't yet optimised the benefits of commercial property Sipps,' notes managing director, Chris Hallett. A partnership Sipp can be used to buy the firm's business premises, or other commercial property, with loans of up to 75% available. An agreed commercial rent is paid gross into the Sipp, then reinvested or used to fund income for retiring partners. Pointon York is also doing more 'syndicated' Sipps business, where individuals club together to own a share in commercial property through their Sipps (the property itself is owned by the Sipp trustee). 'Some people's strategy is to invest £40,000 into a number of syndicates to get a nice spread of commercial property,' says Chris Hallett. Certain providers will insist investors use particular solicitors and lenders, and it's important to use an experienced provider; for example, any syndicate agreement must state what will happen in foreseeable circumstances like members dying or falling out, and the provider must have clear systems for accounting for individual members' shares. Given the bespoke nature of Sipps, administration can be complex and requires efficient, highly automated systems. Jan Regnart, managing director of provider James Hay Pension Trustees, says a good provider should provide detailed paper and on-line valuations, including valuations in advance of anniversary dates, and allow clients to see their portfolio breakdown, cash balances and transfer values on-line in real time. Limitations Bespoke Sipps may still have some limitations; Suffolk Life doesn't allow secondhand endowment policies, on the basis they're difficult to value, whereas James Hay permits any Revenue-approved asset. As well as its bespoke Sipp, James Hay offers a lite version for people with as little as £1,000, using its 'supermarket' of 450-plus investment funds. By going this route investors also avoid paying initial fees on funds'James Hay charges 0.75% a year for running the Sipp. Suffolk Life also offers a budget Sipp for portfolios under £25,000, at £120 to set up and £120 a year to run, plus £20 per investment transaction. However, it can hold just a single investment, like one investment fund or one company's shares. At the other end of the scale, people with at least £250,000 can have the Sipp portfolio managed to their own specifications by one of four discretionary asset managers, for 1.4% of the portfolio value a year. Otherwise, James Hay charges £455 a year to administer bespoke Sipp portfolios worth up to £100,000 and £355 for those above, plus a £290 setup cost and £30 per transaction up to £300 a year for both. Dealing costs must also be taken into account. A number of companies, including on-line stockbrokers, are aiming to bring Sipps to the mass market by linking on-line dealing in shares, bonds, warrants and funds to Sipp wrappers. Sippdeal's e-Sipp can be established for upwards of £1,000 and the setup cost is £100. There's no annual management or separate transaction fee'just a 0.75% commission on each trade in shares, bonds and warrants subject to a minimum £15 and maximum £30. Sippdeal rebates any initial commission it receives on unit trusts back to investors in favour of a flat £20 dealing commission. Elsewhere, stockbroker Hargreaves Lansdown doesn't charge a setup or an annual fee for Sipps, and sharedealing costs range from £9.95 to £29.95 on-line, and £10 to £50 by phone. Jan Regnart claims fixed annual fees can still be a better deal for active investors than transaction-based charges. On-line Sipps do tend to be more limited in investment choice than traditional versions; for example, Sippdeal doesn't permit commercial property or options within its e-Sipp. Considering how much investment scope is necessary and how often you're likely to trade is therefore important. It's also worth checking how much access an on-line Sipp gives to investment funds and overseas shares. For example, Hargreaves Lansdown's website offers dealing in 'hundreds' of US and European shares, whereas Sippdeal offers 'a selection' via the broker James Brearley & Sons' Internet platform. The quality and cost of research and analytical tools is also worth comparing prior to choosing an on-line provider. And because they offer no advice, they'll naturally suit a more experienced or self-directed investor who doesn't need advice or who is already working in tandem with an adviser and simply wants to execute decisions. Finally, a pension is the key to future financial security and any company entrusted with it must be around for the long term. Suffolk Life's Henry Catchpole voices doubt that some on-line providers can remain profitable in the face of tough competition for consumers. 'We're an insurance company so all policies have statutory protection up to 90% of the value of the fund, and that's indemnified by all other insurance companies,' he adds. However, Fergus Lyons says Sippdeal has no plans to change its pricing structure and is able to run around seven times the number of Sipps as an off-line provider with the same staff. Pointon York's Chris Hallet says one of the benefits of a Sipp is that assets are held in a trust, affording the legal protection of a trust deed.
Contacts Andrea Page is a freelance journalist writing on investment, property and lifestyle issues for a range of UK and international titles including Bloomberg Money and FT Expat magazines. | |