REACHING the three-decade mark presents a natural opportunity to consider what has passed as well as what might come to pass in the future. By this milestone, most of us will have also experienced significant life events - the Self-Invested Personal Pension (Sipp) is no different.
Introduced by the Finance Act 1989, the Sipp was born out of a simple concept - to make it easier for people in personal pension schemes to manage their own investments. But despite the many notable events that have shaped the Sipp sector, it is perhaps a non-event around permitted investments that the Sipp is probably most famously known for.
In late 2002, as part of pensions tax simplification reforms that were introduced in April 2006, it was proposed that investment restrictions would be removed to enable Sipps to invest in residential property. A tidal wave of interest then ensued.
Initially, fears were discounted that this liberal approach would distort the residential property market. But, ultimately, this change was revoked with only four months to go.
While the general premise of do-it-yourself is a strong enough draw for many, two significant reforms, which were both introduced in April 2015, have made pensions in general a more attractive proposition.
This first of these, was the removal of the 55 per cent tax rate on pensions at death. Under these reforms, anyone who dies before age 75 is now able to pass their money-purchase pension to any beneficiary completely tax-free. Those aged 75 and over are still able to pass their money-purchase pension to a beneficiary, but it will be taxed at the beneficiary’s marginal rate of tax.
Significantly, this change also presented the opportunity for pension wealth to be passed down the generations, avoiding the usual inheritance-tax considerations.
Then there were the pension freedom reforms, which removed the requirement to annuitise and allow people the freedom to withdraw their pension saving without limit or condition.
It has not all been positive. Much has been said on Sipp investment flexibility being taken too far and being used as a vehicle to access speculative, high-risk investments or even scams. Ordinary investors have lost pension savings accumulated over a lifetime as a result.
The exact extent of what liability Sipp operators have in such cases will be tested in several cases that are still to be heard in court. The regulator has already put firms on notice to consider the potential implications for their business.
Despite this, there is plenty to suggest that the Sipp market’s upward trajectory will continue. In the six months from October 2017 to March 2018 an increase of 86% of defined benefit to defined contribution transfers was recorded by the Association of British Insurers.
More recent data suggests such transfers have peaked, as advisers withdraw from this market as regulatory scrutiny increases, and in turn indemnity insurers tighten their requirements.
Only last month the regulator expressed concerns about the level of members being recommended to take the all-or-nothing decision to transfer their valuable guaranteed defined benefits.
However, partial transfers may offer a best of both world’s solution here, giving individuals both security and freedom. It is not unreasonable to assume that if such transfers continue to gain awareness and popularity they could be responsible for the next significant flow of funds to Sipps.
As full disclosure of all costs and charges becomes the regulatory norm, scrutiny and challenge of what people are paying will increase. Price pressure could result, although effective competition is usually healthier for any market in the long run.
From simple beginnings to mainstream popularity, is a simple summary to now. But there might just be some growth in the Sipp market still to come.
Lee Halpin is technical director at @sipp.
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