The personal pensions world was very different 50 years ago when Money Management was first published. Retirement annuity contracts (RACs), the forerunner of today’s personal pensions, had been introduced just six years earlier in 1956.
They were offered only by insurance companies and had very limited appeal but, for 15 years they provided a simple – albeit unexciting – framework for personal pensions.
Start of something new
Then, in 1971, there were two significant changes: the contribution limit of £7,500 pa for personal pensions was raised to 15% of earnings, with a limit of £1,500 pa – the equivalent of around £18,285 pa in today’s money – and, at that time, a facility to commute part of the pension for a tax free lump sum was introduced.
This seemed revolutionary at the time, but it is interesting to compare that £18k limit with today’s £50k.
That doubling of the contribution limit coupled with the potential for a cash lump sum suddenly made RACs look much more interesting.
One person in particular took an interest. Alan Catchpole was a solicitor in Ipswich, specialising in tax law. He wanted to take out an RAC and, looking around at the insurance companies offering them, did not like the choices available. So he decided to set up his own insurance company.
As a commercial solicitor, he had had experience of forming a bank for a client and getting all the regulatory permissions, so he set about getting approval from the Department of Trade for a new life company to issue RACs to him and his partners. The result – in 1971 - was the first self invested RAC and the forerunner of today’s SIPPs.
The insurance company could borrow to invest, so early investments included property alongside stocks and shares, and other assets.
Partners in his law practice soon joined in – why pay your hard earned cash to some faceless insurance company when you can take control of it yourself and invest in things on which you can see good returns?
Having established the concept, other insurance companies eventually cottoned on and started to offer self investment for their retirement annuities (see side bar).
Dawn of SSAS
At around the same time, the 1973 Finance Act unlocked tax efficient pensions for controlling directors who were allowed to join employer funded pension schemes for the first time.
This paved the way for small self administered pension schemes (SSASs). A traditional occupational scheme was set up for the workforce as a whole, whereas a SSAS was set up for the most senior people – usually shareholder directors – as a highly tax efficient vehicle.
Established under a deed of trust, with the directors as the trustees, they could decide how the – often substantial – pension fund was invested, much as Alan Catchpole and his compatriots did.
For some years, SSASs were used to invest in a wide range of assets – yachts and villas are often cited – until the Inland Revenue published Memorandum 58 in 1979. This put a tight regulatory framework around SSASs – including the kinds of investment that were acceptable. But having received clarity from the Revenue, the market grew rapidly.
In 1981, S.32 of the Finance Act allowed people to transfer benefits from occupational schemes into a personal arrangement, opening up new opportunities for people to take control of their pension funds. Early offerings were traditional insured arrangements, but self invested options followed some years later.
Personal pensions arrive…
Whilst retirement annuities had done a decent job over 30 years, in 1988 they were themselves retired, and replaced with personal pensions (PP), which had similar, but more flexible rules. Crucially, a wider range of institutions could offer PPs, not just insurance companies.
The drive at the time was for more portable pensions that people could take with them from job to job. Insurance company marketing departments moved into overdrive, with numerous new products launched.
… with SIPPs in hot pursuit
Then in his 1989 budget speech, Nigel Lawson announced new investment freedoms for PP investors and SIPPs were born – it is said that the first SIPP was written in 1990 by Personal Pension Management Limited.
Early SIPPs were offered mainly by SSAS practitioners, building on their established SSAS expertise and systems. Establishment and annual fees were relatively high, reflecting the high service and personalised nature of each individual plan.
With the notable exception of Provident Life under John Moret’s inspiration, which wrote the first SIPP to be offered by an insurance company in early 1991, insurance providers were generally slow to the scene – the fee based nature of SIPPs did not readily fit their asset based fee models.
The early 1990s saw slow but steady growth as advisers and clients gradually came to terms with the new flexibility and freedoms that SIPPs offered. Property and accounts with investment managers were the most popular investment areas, as clients took active control of their pension pots.
Income drawdown
But the key catalyst for dramatic growth was the introduction of income drawdown in 1995 – in particular the rule that, once a client had entered drawdown, they could not later switch pension providers.
This was a knockout blow for insured pensions: why lock yourself into one insurance company’s funds for life? If they perform badly, there is no escape.
So the open architecture design of a SIPP with an almost unlimited fund range became a compelling feature and SIPPs took off, growing from an estimated 12,000 plans in 1995 to around 190,000 at A-Day – growth of around 30% pa.
Houses and wine?
The pension simplification rules introduced at A-Day were the next catalyst and although last minute tax changes put a stop to some of the more exotic investments envisaged, SIPPs had captured the public imagination.
The number of SIPP providers multiplied and numbers of SIPPs written continued their exponential rise.
Current estimates put the total number of SIPPs at 913,000 with total assets of £104.7bn, divided between:
•Simple/platform SIPPs - where all investments must be dealt via a single investment platform;
•Mid range SIPPs, which can offer more flexibility;
•Full range/bespoke SIPPs, which offer a very wide investment range with the ability to choose not only the investment, but also the investment organisation you wish to deal with.
Figure 2 shows how the market has grown since 1995 and Figure 3 shows how the total market is split between plans and assets.
Interestingly, while full range SIPPs represent only 20% of the total number, they account for nearly half the assets, retaining their position as the premium product for higher value clients with more demanding needs.
Back to the future?
Looking back, market growth has been remarkably consistent since 1995, but what is the outlook for self invested pensions now?
There are a number of different forces at work in the market. Regulatory and financial pressures are likely to mean that fewer SIPP providers will be active in future, but the remaining companies will be stronger and fitter.
Innovative providers are developing new propositions, particularly around platform based investment. And a SIPP from an independent specialist offers a unique chance for clients to hold a single SIPP wrapper for life, without being locked into any single investment platform or investment type.
Why should you have to change SIPP wrapper if you want to change your investment platform?
And as retirement options are developed and refined, robust and flexible SIPPs will increasingly offer lifelong solutions. So we are likely to continue to see clients moving from old style, more restrictive and often more expensive contracts into simple, straightforward wrappers, which better meet their long term needs.
Personal pensions have come a very long way in the past 50 years; SIPPs provide a flexible, cost effective and long term framework for clients to continue to use them for the next 50 years. The future for self investment is bright.
Chris Jones is proposition & marketing director of Suffolk Life
