Personal pensions have had a mixed history since their launch 25 years ago.
They came about due to legislation on 1 July 1988 and have been central to the mis-selling scandal of the late 1980s as well as the resurgence of arguably one of the most successful financial products – Sipps.
But despite years of tinkering by numerous governments they have evolved to be one of the cornerstones of financial advice offered by advisers.
Personal pensions came about at the time of the late 1980s stock market boom as investments were burgeoning and many individuals were becoming shareholders with the privatisation of nationalised industries.
At the same time there was a desire in the Thatcher government for people to move around from job to job, and supposedly liberate themselves from their employer’s occupational pension.
So the personal pension was born. It was not too dissimilar to personal pensions today, in that it offered tax relief to contributions made into pensions, and other tax benefits subsequently taken away. But the charges were higher and the investment restrictions were quite severe.
Personal pensions were a big success when they were launched, but suffered somewhat from the industry’s hubris. People got carried away with the stock market and current investment returns and many were lured from what today would be considered safe, gold-plated occupational schemes but were then thought of as boring.
Just as with the endowment mis-selling scandal, the market took a turn for the worse as the economy went into recession in the early 1990s and the returns did not materialise in the way people were promised.
But just as personal pensions were launched a new refined product came on the scene: self-invested personal pensions. According to Ian Hammond, managing director of Rowanmoor, who was there at the beginning, ‘self administered’ would have been a more accurate term than ‘self invested’.
He said: “Self investment was the one thing that they weren’t. In those days it was really just people buying stocks and shares, and just having the flexibility to invest their personal pensions in a fairly conventional way.”
The idea behind Sipps, launched in 1989, was that they freed investors from the restrictions of personal pensions that required investors in the main to invest in the life office’s own funds.
However Sipps were expensive and, according to Mr Hammond, were not distributed very well. It was only when the life offices saw them as a business opportunity that they really took off. Third party administrators came into existence and the insurance companies employed sales forces to get the product into the market.
Mr Hammond said: “When James Hay came back into the market in 1996 it was because it had been confident that lots of life offices wanted to come into the Sipp market, but didn’t want to do the administration. So a lot of insurance companies in 1996, 1997 and 1998 launched Sipps with third party administration contracts, and that boosted the Sipp market.