Mar 23 2012

SIPPs - past, present and future proof

Search sponsored by
ByChris Jones

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.