Self-invested personal pensions account for approximately half of the £300bn of assets sitting on adviser platforms.
The move in 1990 to give people the flexibility to choose their own pension investments through Sipps has been hugely popular, and the pension freedoms that come into force this April will significantly boost the market. In fact, it could double in size over the next couple of years as investors embrace Sipps as the vehicle for income in later life and for estate planning.
While using a Sipp for drawdown is nothing new, the practice is not currently widespread. Roughly 80 per cent choose to purchase annuities at retirement and the market is worth some £12bn a year. The remaining 20 per cent enter drawdown, either linked to some type of life company combination of wrapper and product, or from their own Sipp.
The new pension legislation with its removal of the cap on withdrawals and changes to tax rules on death is a massive change. To really understand the impact of this on the Sipp market, one needs to consider how the market developed.
The Sipp market grew as defined benefit pension schemes disappeared. People with generous DB schemes do not need to connect with their pensions. They do not carry the investment risk and know the value of their future pension for life. Their hopes and fears are pinned on their employer to sort it out.
As defined contribution pension schemes became the norm, the Sipp market started to grow. People started to actually think about their pensions and they suddenly, unpreparedly, began to carry the investment risk and the uncertainty around their future pension income. Sipps became the natural choice for a growing number of people, especially those who did not want a life company deciding how their pension savings were invested. They wanted to control where the money was invested.
Sipps opened up the market by providing a means of unbundling the investment management. The Sipp wrapper ensured that all pension scheme legislation was properly followed, leaving individuals free to choose their own investments.
Historically, people did not even look at what they had in their pension pots and by the same token, they did not understand or look at their options at retirement. At retirement, they almost certainly did not want to read the very long document they received with their options inside it. Many pension products simply put people into annuities by default in response to this inertia.
Under the new pension legislation, people will receive a much clearer and far more concise wake-up pack at retirement age. They will be able to clearly see their options and be offered guidance. They will be directed to the Pension Wise area of the government’s website and receive a leaflet from the Money Advice Service.
In April, thanks in part to pensions minister Steve Webb’s unfortunate Lamborghini comments, the majority will wake up to the realisation that reaching retirement age does not necessitate the purchase of a new financial product, sometimes from a restricted list. It is hoped that the new pension freedoms will finally end the disconnect between savers and their pension pots, encouraging people to think about all their options extremely carefully.