The cost of flexibility

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.

For advisers it can be difficult to spot whether a client should be recommended the flexibility of a Sipp, a low-cost PPP or a stakeholder pension

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.

Their pension product needs are clearly going to be different to those of the more familiar high net-worth clients. Mass affluent customers are likely to be seeking pension consolidation, inflation beating growth from investments, capital security and lifestyle management. While they may not be looking for a bespoke solution, they do want transparent, flexible, tax-efficient products such as a flexible retirement plan.

The major product providers, aware of the needs of mass affluent customers, introduced flexible retirement plans (hybrid/deferred Sipps) after A-day in 2006. Compared to standard PPP/stakeholder pension/Sipp investment these offer more flexibility, wider fund choice, better value for money, built-in lifestyle options, free switches between funds and additional options (such income drawdown) as well as self-investment.

With a range of investment options that fully meet the needs of the mass affluent investor, the deferred Sipp does not require the client to pay for options and services that they are unlikely to ever need. As a result the cost of a flexible pension will generally be lower than a full Sipp.

A standard stakeholder pension annual management charge is 1.5 per cent for the first 10 years. The fund management charge on a wide choice of insured funds in a flexible pension/deferred Sipp need be no higher. For example – after product charges the flexible pension has 1.2 per cent FMC to ‘spend’ over and above its product AMC to equate to the stakeholder 1.5 per cent AMC, which would allow 150 insured funds to choose from with FMC(s) below 1.2 per cent. Note: these figures are based on a deferred Sipp from L&G, with a £50,000 fund value over a 10-year term, on a nil commission basis. Charges have been rounded to one decimal place.

So extra flexibility = no additional charge (until self-investment is activated).

In addition the costs of self-investment on deferred Sipps are often much lower than the equivalent charges for full Sipps, which are intended to cover more complex investment arrangements.

The ‘typical’ deferred Sipp set-up charge for self investment is £300, compared to a typical full Sipp set up charge = £600. And the ongoing self-investment annual charge is as little as £200 on deferred Sipps compared to a full Sipp annual fee of around £500.

We should not perhaps forget to mention the extra saving of an advice fee for transferring into a Sipp from a PPP/stakeholder = typically £1500 on a £50,000 transfer (3 per cent).

This can add up to quite a saving, assuming a 20-year policy life even with self-investment active over half that time. In summary, a flexible retirement plan offers

• Value for money: more investment choice for the same level of charges as a similar investment in a PPP and, if the self-investment option is not required, lower cost than a full Sipp.

• Low cost: there may not be any establishment and annual charges usually associated with traditional Sipps until customers decide to self-invest

• A wide range of passive investments and actively managed investments: from outset clients choose from insured funds, including property, without triggering the self-investment option.

• Fair charging: clients are only charged for the features of the Sipp that they actually use.

• A range of income withdrawal options to suit your clients’ needs.

• The facility to use income drawdown and phased retirement options as customers approach retirement.

Perhaps flexible retirement plans are the key to unlocking the wealth of an emerging mass affluent sector seeking choice and value for money investment solutions.

Colin Batchelor is head of pensions technical of Legal & General Savings