Sipps have a safe future - in spite of Nest eggs
"The world of individual retirement solutions is going to end up with two basic investment products: National Employment Savings Trust (Nest) and a self-invested personal pension (Sipp)," so proclaimed Tom McPhail, head of pensions research at Hargreaves Lansdown.
From its launch in spring 2011, an estimated 7m workers who are currently not saving for retirement will be automatically enrolled into the government-created Nest.
Auto-enrolment to the scheme – or an occupational pension scheme that matches the minimum criteria of Nest - will apply to all workers who have been employed for more than three months and earn over £5,715 per year (£110 per week).
For those earning less than £5,715 per year or are under age 22 or older than the state pension age (currently 65), there’s an optional opt-in to Nest and the employer, irrespective of company size, will legally have to contribute to that employee’s pension plan.
Nest and auto-enrolment will strike the individual pensions market at the point at which Sipps sales are booming. The number of plans has accelerated during the financial crisis and subsequent market and economic uncertainty. In January 2007 there were almost 200,000 collective Sipp plans; by April 2010 there were 400,000, according to data from Sipp provider Suffolk Life.
With the advent of auto-enrolment, resisting making a pension decision will no longer be a viable option for Britons. This could lead to a number of scenarios:
•Nest will be a success and reach a huge swathe of the British public that have been apathetic about saving for retirement. Yes, it will be a crude offering and it will remain to be seen whether the low-cost government-engineered vehicle can deliver a viable pension pot over the newt few decades that will match member expectations, but that will be tomorrow’s debate (for a government of the future).
•The public will be confused by the array of pension options available to them and will either seek financial advice - coinciding, as it will, with the RDR-induced shift to a fee-based model for IFAs – or will turn to ‘supermarket’ style websites for DIY guidance, to the chagrin of professionally qualified advisers.
•The public will remain wary of auto-enrolment and turn to pension products they feel they have greater personal control over, such as Sipps.
•Nest will have no effect; most employees will opt out and their cash-strapped employers will be thankful. Some people remain wary of anything with the word 'pension' and will opt for other tax-efficient vehicles such as Isas, which companies can roll share save schemes into.
Billy Mackay, marketing director of AJ Bell, says: "The challenge with any financial planning matter and pensions in particular is that the needs and circumstances of the UK population varies significantly. As a result, you will find that different segments of the population will react in different ways and you end up with many of the scenarios above playing out according to the needs of investors."