SIPPing the cup of success

SIPPs have been big news in 2007, considering that a year ago many still considered them expensive, unnecessary and in danger of being the next mis-selling scandal.

But costs have come right down, there are moves to allow protected rights and investors are increasingly using the investment flexibility. Should SIPPs (self-invested personal pensions) now be the personal pension plan of choice for everyone?

SIPPs have seen a vast increase in popularity post-A-Day. A recent poll by FundsNetwork showed that over half of advisers (56%) believe that the changes in the concurrency rules (the ability to hold a personal pension alongside a work pension) have given a boost to SIPP business. The increase in contribution limits also encouarged people to take more interest in their pension planning.

SIPP providers are also helping investors make full use of the investment flexibility offered. A recent report by Defaqto found that around half of all SIPPs now link to fund supermarkets and investment choice remains the key selling point of Sipps over traditional personal pension products. Providers have also started packaging advice with their SIPP offerings. BestInvest, for example, recently launched a new SIPP including bespoke advice. It uses its recommended list of funds to populate an asset allocation agreed with the client.

Simon Pimblett, head of research and development at the Route Group, says that a combination of increased contribution limits plus the investment flexibility also helps investors engage with their pension planning.

“SIPPs have become more relevant and interesting to clients. When contributions were smaller, it didn’t tend to ignite their imaginations. It was just necessary housekeeping, but now they have an ability to construct a strategy with assets they understand.”

The future also looks bright. The Department of Work and Pensions started its consultation on the inclusion of protected rights into SIPPs in early December. With SIPPs now regulated by the FSA, the continuing exclusion of protected rights seems anomalous. The consultation runs to the end of February next year. This looks set to remove a significant barrier to the development of SIPPs.

So does the personal pension plan or stakeholder still have a place? There has been criticism of life offices for guiding investors who don’t need the investment flexibility to their more expensive SIPPs rather than their simpler stakeholder plans.

Laith Khalaf, pensions analyst at Hargreaves Lansdown, says: “SIPPs are an investment vehicle for those who want a choice of investments. They don’t come with the same cost guarantees as stakeholder. Stakeholder will often offer a dozen or so funds.”

However, with the right choice of provider, the cost differences between traditional personal pension plans and low-cost SIPPs are now relatively small. Even in a stakeholder plan, some low-cost funds (such as trackers) may actually be more expensive. Fully flexible SIPPs remain relatively expensive and tend to be used where investors want to hold direct property (commercial or foreign) in their pension plan.

The big advantage of stakeholder and other personal pension plans remains the low entry levels. The minimum entry level for low-cost SIPPs is around £50 per month, but Gavin Haynes, investment director at Whitechurch Securities, believes a portfolio of around £50,000 is necessary for a fully flexible managed SIPP account to be cost-effective.

The changes over the past 12 months have democratised the SIPP market and it is now a suitable choice for many more investors who would have previously used traditional pension plans. These are likely to retain an appeal for investors who need lower minimum investment levels. In the SIPP market, high charges are no longer a necessary corollary to investment flexibility. With the inclusion of protected rights in the offing, advisers should expect a further increase in the popularity of SIPPs in 2008.

1 January 2008