Time to look at your pension

THE NEW pensions’ simplification regulations in the UK, which come into force from April 6 2006, are expected to be an enormous boon for Self Invested Personal Pensions (SIPPs), exploiting the pension wrapper’s flexibility. But how well understood are the products? We at Blacktower Financial Management explode some of the myths that have surrounded these schemes.

Pensions’ simplification will herald a new era of investment flexibility within pensions. For very good reasons many have recognised SIPPs as being the model for the future. But, equally, there are many misconceptions about SIPPs that should be dispelled to fully appreciate how the wrapper can migrate into the post-April 6, 2006 world.

So what are today’s ‘misconsipptions’ and how will they relate to the post-April 6 2006 environment? One common myth is that SIPPs are just for the wealthy. SIPPs may have originally been designed for the well-heeled, but, with poor investment returns in recent years, leading to growing disillusionment with traditional pensions, even those with moderate sums are recognising that SIPPs give them an alternative.

With increased job mobility, many people have accumulated reasonable sized funds in various pension schemes and are bringing it all together under their control.

After April 6 2006, consolidation is likely to continue and, if the public do wake up to the need to invest more into pensions, more people will accumulate sufficient funds to explore the self invested route.

A whole range of SIPPs to choose from

It is also widely believed that SIPPs are expensive. Competition and technology have driven costs down, but the notion of expense is more to do with picking the right product for your needs. There is a whole range of SIPPs on the market – from simple pension wrappers around online equity and fund dealing accounts, to full SIPPs offering the whole spectrum of investments, including commercial property.

In much the same way that buying a hi-fi with lots of gizmos would be expensive if you only listen to The Archers, a full SIPP would appear expensive for those just wishing to invest in, say, unit trusts. Even then, the pros and cons of plans that charge on a percentage of fund basis have specific event driven charges, or have an all-encompassing flat fee that needs to be considered.

Value for money

But, of course, it is not just about the gizmos, there is the quality of service and, here, the cheapest is not necessarily the best. It is really about value for money.

Post-April 6 2006 for mainstream investments, competition, technology and increased volumes will continue to drive costs down. For the less common, more esoteric end of the investment spectrum, such market forces will not be as strong. Some investments may require greater manual processing and additional monitoring controls, which must be priced-in accordingly.

SIPPs are also not just used for investment flexibility. While choice of investments and investment managers is key, SIPPs are also very effective in delivering retirement planning facilities, such as income draw-down and phased retirement for those looking for alternatives to annuities.

Post-April 6 2006 enhanced drawdown rules, allowing tax-free cash to be drawn without the need to take income, will widen the appeal with even more retirement and tax planning opportunities.

Furthermore, drawdown beyond age 75, in the form of alternatively secured pensions, will appeal to those who are averse to annuities and it also appears to offer some potential for IHT planning.

Pensions for workers

SIPPs are extremely useful for the self-employed. For example, partners in a solicitors’ firm might use their SIPPs to purchase their office premises. However, like any other personal pension, SIPPs are also open to those who are employed, unemployed or even children. Although, where contributions are limited to a maximum of 3,600 pounds sterling each year, cost and adequate diversification need to be considered. At the moment it is high earners in occupational pension schemes who miss out.

Post-April 6 2006, we will see full concurrency. This will allow those 30,000 sterling pounds earners to top up their retirement provision with this new breed of flexible pension with perhaps the bulk of their provision in a relatively secure environment.

As for controlling directors, the future is still uncertain. Some of the new rules appear to favour self-investment via an occupational type scheme, akin to today’s small self-administered scheme, but others favour the SIPP type structure.

SIPPs have enjoyed a growing appeal to a wider audience and post-April 6, 2006 will see that appeal grow further. But will it still be called a SIPP? Some arrangements will offer a near full range of investments, others a limited range and yet others offering some specialist parts of the new investment spectrum, plus the prospect of occupational type set-ups for controlling directors.

New investment opportunities

The new post-April 6, 2006 regulations, combined with the enhanced flexibility of SIPPs, create, as never before, enormous opportunities and investment potential for anyone who has a UK-based pension scheme. To take advantage of this, you should review your schemes now and establish what changes need to be made, while there is still time to introduce some of the pre-April 6, 2006 beneficial aspects, in order to position yourself to take advantage of the new regulations.