Continuing our occasional Back to basic series, Stephen McPhillips, technical sales director, Dentons Pension Management, looks at the structure of a SIPP, how they vary in the market from ‘simple’ to ‘full’ SIPPs, and what that means for paraplanners looking for the right one for their individual clients.
Most, if not all, readers will have come across the acronym ‘SIPP’ in their careers to date, and all will have a perception of what a “SIPP” means to them, based on their previous research and / or experience. Self invested personal pensions (SIPPs) come in many shapes / sizes / flavours and this article sets-out to identify some key features of SIPPs and also to identify where one flavour of SIPP can differ from another. The ability to self invest personal pension monies gained prominence following the publication of Joint Office Memorandum 101 in 1989.
What is a SIPP?
A SIPP is a Registered Pension Scheme as defined in section 150(2) of The Finance Act 2004. A Registered Pension Scheme is a pension scheme that is registered under part 4 Finance Act 2004.
HMRC’s Pensions Tax Manual (PTM) states:
“Each pension scheme is split into one or more arrangements for its members” and that “an “arrangement” is any contract, agreement or arrangement for the purposes of which a scheme holds sums and assets relating to an individual member, and under which benefits are provided. A member may have more than one arrangement under a scheme and an individual arrangement cannot be made under more than one registered pension scheme.”
That’s enough of the legalities!
As readers will be fully aware, a Registered Pension Scheme carries with it a number of tax advantages, including the possibility of tax-relievable employer and / or member contributions, (generally) tax-free investment returns, tax-free capital gains, the possibility of a tax-free lump sum upon crystallising retirement benefits, potentially tax-free death benefit payments to beneficiaries and so on.
Hence, there are sound reasons why a person may choose to save for their future in this way as opposed to, or more commonly, in conjunction with, other forms of long term saving.
The above, however, does not shed any light on why there are many different “flavours” to SIPPs.
Why might one SIPP differ from another?
If we stick with the flavours analogy for a moment, some SIPPs are described in the financial services world as “vanilla.” This is generally a term used to describe a SIPP that offers basic investment flexibility, but flexibility to invest beyond an insurance company’s own insured pension fund offerings (so to distinguish them from an insured personal pension which can access only that insurance company’s own managed funds). A “vanilla” SIPP typically will not allow investment into more complex assets such as hedge funds, unquoted equities, loans to unconnected parties, direct commercial property and so on.
It is important to say at this stage that the term “SIPP” is used to describe a wide range of Registered Pension Scheme wrappers, and there is no universally agreed definition of what constitutes a “simple” SIPP, what constitutes a “full” SIPP and so on.
For many clients, a “vanilla” SIPP will meet their investment needs throughout their lifetime and, consequently, there is an abundance of SIPP products available to service those clients in a fairly crowded marketplace.
However, a number of clients will have investment needs that extend beyond a relatively narrow universe of investment options – perhaps early-on in their savings journeys or later-on as their retirement funds build up. For those clients, a “vanilla” SIPP may not offer the level of flexibility that they require. This might not relate solely to investment flexibility either – it might also include access to a wider range of retirement options, such as flexi-access drawdown, which might not be available with the vanilla flavour option. Depending on the provider / contract, it might not be possible to add flavouring to a vanilla SIPP to enhance it. By this I mean, it might not be possible to widen the flexibility – be that investment flexibility or otherwise – and the client might find that it is necessary to change product / provider to achieve his or her goals.
For these reasons, and many more, consumers have a very wide range of SIPPs to choose from. Indeed, for some, that wide range may be daunting to the extent that they simply cannot make a decision without professional help from a financial advice firm. That, of course, is good news for the advice profession, but it does place the burden of research and recommendation upon the financial advice firm.
What does “good” look like in relation to SIPPs?
In selecting a SIPP contract / provider to meet a client’s needs, a paraplanner will have many aspects to consider and weigh-up against each other.
Clearly, one consideration will be cost, but, as in many walks of life, “cheap” isn’t necessarily always “cheerful” and a very-low cost SIPP option might prove to be problematic for both client and adviser. That might manifest itself in the form of poor service levels, poor online functionality, a limited range of investment / retirement options with no upgrade facility, and so on. These, in turn, might require the adviser firm to re-visit the initial recommendation and to suggest a change of product / provider – often at a cost to the client. At the extreme, the failure of a SIPP provider can cause significant uncertainty and stress to both the client and adviser firm.
Hence, a “good” SIPP could be one can accommodate the client’s straightforward investment needs initially – and in a cost-effective manner, one that is easily upgradable if / when required or dictated by the client’s needs, one that is provided by a well-respected and well capitalised provider and one whose service credentials are outstanding.