PensionsFeb 9 2012

Horses for courses

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There are two basic types of Sipp. On the one hand we have the ‘full Sipp’ which aims to offer as far as possible the full range of investments permitted by HMRC rules and on the other we have the ‘packaged Sipp’ that only offers a relatively small range of investments, or which perhaps limits investment choice to the funds managed by a particular life office.

It has been suggested by the FSA and others that self-invested pensions that “offer only limited investor choice from within a restricted range of asset classes” – that is, packaged Sipps – are really only standard personal pension schemes “marketed and sold as Sipps”.

In the main, this is probably true, but there are still good reasons why it might sometimes be appropriate to recommend a packaged Sipp.

The wide choice of investments available under Sipps is one of the main characteristics that differentiate them from other personal pension plans; even a packaged Sipp will tend to offer a greater range of investment options than a standard personal pension, and full Sipps aim to accommodate unrestricted investments within HMRC rules.

Direct investments in commercial property (including the member’s own business premises), unquoted company shares, structured products and UK Reits, to name but a few types of investments, will generally be allowed under a full Sipp. Although a few packaged Sipps also allow investments in some of these assets – commercial property, for example – very few (if any) set out their stall with the promise to consider any HMRC permitted investment.

Apart from the type of investments from which a client can choose, a packaged Sipp may also limit choice to authorised unit trusts and Oeics from a given fund manager. This is quite common where the Sipp is provided by a life office with its own fund range. Alternatively, Sipps offered by stockbrokers and discretionary fund managers may allow investments in all listed securities, for example, provided the client is prepared to use the broker’s own dealing account or discretionary service. A full Sipp will tend to have no such restrictions, although they may offer a preferential charging structure if the client opts to use a preferred stockbroker or discretionary service.

Where the packaged Sipp’s more restrictive investment choice should really pay dividends is when it comes to fund switches and surrenders: it stands to reason that if the Sipp acts purely as a wrapper for a life office’s own fund range, switching between those funds should be both cheap and efficient, and generally this is the case.

The gap is being closed, however, by full Sipps working in partnership with providers of fund supermarkets and platforms. Some Sipp providers are approaching this by developing ‘synergies’ with platform providers and discretionary fund managers. Other providers may simply allow a client to use any platform of their own choice. Placing and selling investments is then as quick and painless as the choice of platform allows. Some high-end platforms also allow a client to keep their personal investments and those held by their third party Sipp side-by-side in the same account.

One aspect of using a full Sipp as a shell for another provider’s platform – or as a means to hold unitised investments in general – that cannot be ignored is that of cost: using a full Sipp to house a third party platform will involve two levels of charges, and perhaps another charge from each fund manager.

By comparison, the cost of a packaged Sipp may include the charges for using a life office’s funds or a discretionary fund manager’s trading account, or vice versa. The packaged Sipp provider can often be prepared to offer a low or non-existent charge for the use of their Sipp because they are deriving an income from managing the client’s funds, an option that is unavailable to the vast majority of full Sipp providers.

Perhaps one thing that full Sipps tend to have on their side is transparency when it comes to the costs involved. A fixed fee, based on a menu of charges depending on the services a client requires, can be simpler to understand than the often bundled charging structure of packaged Sipps. Transparency is very important to clients and advisers, which is why it is vital that the FSA takes the time to consider carefully its cost disclosure requirements for personal pensions (a consultation that the FSA will probably resume this year).

Finally, Sipps can often be distinguished from other personal pensions by the range of options they allow in retirement: any true Sipp will accommodate both capped and flexible drawdown, including phased drawdown. In addition, whereas a packaged Sipp from a life company may allow the client to take an annuity (rather than oblige them to transfer their pension elsewhere for an annuity purchase), some full Sipp providers offer a scheme pension option. Unlike capped drawdown and annuities, scheme pensions are not tied to historically low annuity rates, and so at the moment are seen as a welcome alternative, despite the uncertainty over their apparent classification as ‘defined benefits’ arrangements in the Pensions Act 2011.

The key differences between full Sipps and packaged Sipps show that both have a place in the market, but are aimed at clients with very different objectives in mind: it would be difficult to justify the additional cost and flexibility of a full Sipp for a client with a small pension pot, and who has no interest in investments beyond the limited range of funds available from a single life office, and by the same token it would be fruitless to point a client in the direction of many packaged Sipp providers if they are interested in buying a commercial property or investing through a specific discretionary fund manager because the Sipp, while probably inexpensive, will not do what they want it to.

Carl Lamb is managing director of Almary Green Investments