Osborne’s pensions overhaul plays to Sipp strengths

The changes, which take effect from April 2015, mean a person in a defined-contribution scheme will have access to their pension fund without the need to purchase an annuity, with the tax-free lump sum of up to 25 per cent of the value of the pot remaining available.

According to the Pensions Advisory Service, interim reforms, which came into force on 27 March this year, include an increase in the capped drawdown limit to 150 per cent of an equivalent annuity from 120 per cent and a rise in the maximum lump sum from £2,000 to £10,000 that can be taken from one scheme, regardless of savings in other schemes. There has also been a reduction in the minimum income requirement for flexible drawdown to £12,000.

Laura de Vries, pension consultant at Walker Crips Pensions, believes the changes have altered people’s perceptions about saving for retirement.

“There’s ultimately going to be more money under management in pensions, so that’s going to be good for Sipps because the more money people have in pensions, the more control they’re going to want to have over it themselves.

“And, obviously, with Sipps you do get more choice as to how you can invest your money,” she adds.

Ms de Vries claims a person saving for retirement under the new rules may see their pension pot as an additional savings account to “dip” into.

She explains: “More people will try to contribute to pensions because they know that money is not going to be locked away forever. I think there was a perception that money in a pension was not necessarily your money because it wasn’t tangible. There was always a limit on how much you could take.”

However, David Smith, wealth management director at Bestinvest, argues that the market for Sipps was already seeing increased demand before the changes to pensions were outlined.

“I think the stakeholder pension market had pretty much already died on its feet,” says Mr Smith. “The vast majority of all pension business, certainly in advised sales terms, was already going into Sipps. The main benefit of that was the transparent charges and open architecture in terms of putting funds together, so [it is] a more diverse investment solution.”

He observes that the reforms are the “nail in the coffin” of conventional personal pensions and stakeholder pensions. Mr Smith continues: “The only time we would actively consider using them is for a very small pot where the client has no interest in strategy and was just saving a small amount.

“For more astute clients who want a diverse strategy and want to take advantage of the Budget reforms, Sipps are really the only viable option now.”

He forecasts that even more money will move out of personal pensions and into the Sipp market when the reforms roll out next year. Mr Smith points out: “The other benefit of Sipps… is that each and every one of them will be ready to take full advantage of the new rules. In personal pensions it seems unlikely many providers will even offer the new rules because, although it is legislation, the providers aren’t being forced to offer the flexibility.”

SIPPS KEY FIGURES

150 per cent – The capped drawdown limit of an equivalent annuity, up from 120 per cent

25 per cent – The amount that can be taken from a pension pot tax free from April 2015

£30,000 – Those with pension pots of £30,000 or less can take the entire amount as a cash lump sum under interim changes between March 2014 and April 2015

Source: Money Advice Service