At a time when much of the UK’s pension provision is going into meltdown, there is one area of the market that over the past few years seems to have defied gravity: SIPPs.
Final salary pension schemes are in terminal decline; the state pension system is preposterously complicated, inefficient and ungenerous; and recent research suggests that voluntary contributions to personal pensions are also falling.
To cap it all, overall household savings are at the lowest level they have been since the late 1950s. Against this backdrop, the SIPP market has gone through an astonishing period of growth, with anecdotal evidence suggesting sector growth of around 50% a year for the past few years. It is clear that SIPPs have something that other pensions don’t.
Low cost online SIPPs are where the action is
Until a few years ago SIPPs were high-value, high-cost pension plans for investors who wanted a bespoke service. The fees for these arrangements ran to hundreds, or even thousands of pounds a year, but in exchange investors had complete control over where their pension fund was invested.
This could include, for example, an investor buying a commercial property with their pension and then renting the building from their pension fund as a commercial tenant, with the advantage that they were paying rent to their own pension fund. The cost of such schemes meant that SIPPs weren’t generally suitable unless you had at least £100,000 to invest.
This type of specialist SIPP does still exist, but this is not where the SIPP market growth has been in recent years. Much of the SIPP market growth has come at the expense of what would once have been personal pension transactions.
A wider choice than traditional pensions
Personal Pensions have offered relatively limited investment freedom – typically between 20 and 100 investment funds. This limitation on fund choice has proved a problem for investors who want to get the best in any given sector; if you only have two funds to choose from and they are both poorly run, then you are a bit stuck.
The development of online services, of fund supermarkets in particular, and of low-cost execution-only share trading has opened up the possibility of giving access to SIPPs to relatively ‘ordinary’ investors.
A SIPP offering access to a thousand or more funds, direct equity trading, and a cash account for holding money in, offers the perfect tool for the vast majority of investors to manage their retirement savings.
There are now several SIPP providers willing to accept investments of £200 per month or even less. The emphasis now is very much on providing something more than an old-fashioned personal pension, at a price that is considerably less than an old-fashioned SIPP.
The bottom line with investing for retirement is that there are three key factors that matter more than anything else:
• How long you invest for
• How much you invest
• Where your money is invested
Starting early is important but difficult
For many people, the first two are difficult to control. Starting a pension at the age of 18 is great in theory, but difficult in practice; similarly, investing 20% of your income in a pension may be an ideal funding rate, but is simply beyond most people’s finances. But everyone can take an interest in their pension investments, and hopefully get the most out of the money they have saved.
To take an extreme example, if you start young, and save a good amount, but plough all your money into cash for 40 years, then you probably won’t get a very good retirement income.
For the vast majority of investors, a pension that offers a wide range of unit trusts, direct equity investments, and the ability to hold cash delivers enough freedom to get the most out of their savings, without sacrificing too much growth in charges.
Going forward, it looks to me as if the ‘money purchase’ pensions world is going to polarise. On the one hand we will have Personal Accounts, the lowest-common-denominator state sponsored pension for people who don’t want to have to think about their retirement savings, or care too much what they get back; and SIPPs for everyone else.
Tom McPhail is Head of Pensions Research at Hargreaves Lansdown.
