The cost of flexibility

Investment ‘flexibility’ is a key feature of pensions today but when personal pension plans were introduced in 1988 they were far from flexible with plan holders restricted to funds offered by their product provider.

However, the government had a desire to widen the flexibility and appeal of personal pension provision and the Sipp concept was given the green light by Nigel Lawson in March 1989 to “make it easier for people in personal pension schemes to manage their own investments”. Over time Sipps have become synonymous with flexibility in personal pensions.

The number of Sipps began to grow. By 2008, 633,000 Sipps were in force, according to ABI estimates, and a report by Mintel in 2010 estimated new single premium business had grown by a staggering 679 per cent between 2004 and end of 2009.

Today pension choice is wider than ever, yet Sipps have captured the imagination of advisers and savers more than any other individual pension product.

It is probably true to say that for the majority of clients there will not be a lot of self-investing in a Sipp. So what is the attraction? I think it is down to the simple fact that a Sipp is just a personal pension with a very wide investment choice. Advisers can choose the very best fund managers and add breadth and quality to a client’s total investment portfolio and pension provision.

For many advisers though, it can often be difficult to spot whether the client in front of them should be recommended the flexibility of a Sipp, a low-cost PPP or a stakeholder pension. If your client becomes one of the more affluent members of society you may have to recommend a transfer to a Sipp at a later date. Any advice to transfer a client’s pension from one provider to another has to be shown to be ‘suitable’. In the case of Sipp transfers, investment flexibility and greater control of assets is often cited. And, of course, the suitability report also requires costs to be justified. There is a solution. The additional flexibility of a deferred Sipp - also called a flexible retirement plan or a hybrid Sipp - would enable self-investment at the appropriate time without the need to take out a new plan.

Many in the pensions industry believe there is little scope for consumers with smaller pension pots being able to afford to pay for Sipp advice. However, the Mintel report suggests that, while currently under-represented in the Sipp market, a significant proportion of savers with comparatively low household incomes could eventually build up enough assets to be worth consolidating into a Sipp.

These households would fall into the ‘mass affluent’ sector, which is thought to number around 9m individuals with an impressive £750bn in liquid assets and growing.