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.
“With the market having grown you’ve got lots of people thinking: ‘how do we get people to develop this market?’ You have stockbrokers selling their wares in a Sipp. Sipps became much more accessible with all the life offices involved, and that continued through the early 2000s.”
Such was the success of the Sipp that it eclipsed the original personal pensions, which eventually started to resemble them by offering more flexibility. Sipps in turn became cheaper, with the launch of low-cost Sipps in October 2000, so the market started to evolve into what it is today, a universe occupied by the bespoke, high-end product for the high net-worth, with many investment options to choose from and the cheaper low-end Sipp that acts like a tax wrapper, with a range of funds to choose from.
But despite all the innovations on the product side, personal pensions could not escape the thorny issue of government meddling. Bound by legislation, and at the same time bringing in a huge amount of money, there has been constant fiddling in terms of investments allowed or unallowed. The sudden about-turn on residential properties in Sipps in December 2005 is one example – a subject that made a return in this March’s Budget – or the changes to lifetime allowance and the protections applied is another.
One of the biggest changes to happen was in 2006 with the arrival of pension simplification, or ‘A-Day’. It was designed to bring eight pension regimes under one umbrella and rationalise some of the legislation.
Laith Khalaf, head of corporate research for Hargreaves Lansdown, said: “The idea was to simplify pensions. Arguably that hasn’t been achieved to a great extent. It was a simplification but it didn’t go as far as it could.
“I think government meddling should be something they look to minimise; there’s lots of temptation to come along and change the rules. There have been some positives, such as the introduction of flexible drawdown, but looking at the broad context, people need to know what they’re saving into is stable.”
Steve Bee, founder and chief executive of Jargonfree Benefits, said that some good had come from government involvement. He added: “Allowing people to have their own personal pension as well as being members of a company pension scheme, to have more than one pension on the go at once, was a really good idea.”
However the most recent change could have the biggest impact of all: the arrival of auto-enrolment. So far the opt-out rates have been very low – take-up is 90 per cent – but Mr Bee believes it will mean the end of the personal pension.
He said: “I think time is up for personal pensions. Auto-enrolment kills them, apart from the self-employed. The restrictions are unhelpful. Why there should be any restrictions, I don’t know.
“I think the government should concentrate on where people don’t save enough rather than worry about saving too much.”
Melanie Tringham is features editor of Financial Adviser