Suffolk LifeOct 16 2017

Sipps: Will freedoms be a short-term boost or long-term gain?

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
Sipps: Will freedoms be a short-term boost or long-term gain?

The pensions freedoms have undeniably been big news for Sipps. Nearly two-and-a-half years later, discussing the effects is still one of the biggest topics around. Because while the onslaught of legislative and regulatory change might have slowed, the pensions industry is still coming to terms with the changes, assessing what’s happened so far and trying to anticipate what might happen next.

There has been a significant boost in popularity for Sipps. If there’s one word that summarises the freedoms, it’s flexibility – and Sipps were already among the most flexible pension products before the 2015 changes. Investors want to take advantage of the new rules and have as many options open to them as possible, so the popularity of Sipps has increased.

The next question, of course, is whether this trend will continue. There are arguments on both sides.

Full speed ahead

Let’s look at the ‘for’ camp first. For starters, available data suggests that the pensions freedoms are still growing in popularity. Figures released by HM Revenue & Customs (HMRC) in July showed that the second quarter of 2017 set a new record for the value of funds withdrawn. 

While this isn’t the same as new Sipps business, you could argue that Sipps will remain popular as long as consumers want flexible options, and these figures show the freedoms are still proving popular.

In terms of Sipps numbers, statistics from Origo show that transfers into Sipps now account for around 43 per cent of transfers into new pensions – more than twice the 21 per cent figure from before the freedoms. Transfers into other individual and group personal pensions have stayed almost static in the same period: collectively increasing from 34 per cent to 37 per cent. 

At the same time, Office for National Statistics (ONS) figures show there will be increasing numbers of over 55s over the coming years as baby boomers reach retirement, which supports the argument that Sipps business will continue to grow. Additionally, such plans are likely to be held longer than they would have been in the past, with no requirement to take benefits by the age of 75 and far fewer choosing to annuitise since the freedoms. 

Sipps are also enormously flexible in terms of investments, and there’s been a lot of discussion in the industry about investment strategies for consumers in drawdown. Sipps are likely to be able to cater for any investment strategy chosen by an adviser or investor, which will help to maintain their popularity.

Another area of discussion is, of course, defined benefit (DB) transfers. Sipps appear to be the pension of choice for investors transferring away from their DB schemes, with many firms reporting large increases in DB transfers. 

In Suffolk Life’s experience, for example, while DB transfers still make up a relatively small proportion of total transfers, they have increased five-fold in just the space of a year. We know that high transfer values and perhaps nervousness about the future of DB schemes are fuelling many of the transfers, but another key driver is death benefits. 

Since the major changes to death benefits in 2015 (and later amendments in 2016), these benefits from money purchase pensions can be very flexible and tax-efficient. However, not all money purchase schemes will offer access to the full range of death benefits that are now available, so this is another area where Sipps have the advantage.

The fact Sipps will often offer full death benefits flexibility isn’t just a draw for investors leaving DB schemes. Advisers are increasingly aware that beneficiaries are normally restricted to the death benefits available in the scheme where the investor died. As such, they are making sure their clients are in schemes that offer the required benefits.

We also know private pension provision is becoming increasingly important, and that despite the bad press, pension saving is on the rise. Although this is mainly because of auto-enrolment, there’s also the argument that the pension freedoms have played their part. The main message to the public was that the pension freedoms give people control of their money again. 

The hope is that people will feel more confident saving if they can access their money in a way that suits them when the time comes. If pension saving is on the rise with a generation of savers who want and expect control over their savings and flexible retirement options, the future still looks bright for Sipps.

The case against

On the other hand, there are also reasons to argue that Sipps business won’t continue to grow, or at least not at the same rate as it has done so far. The first reason that comes to mind is the increased level of regulatory scrutiny in several key areas. The pension freedoms led to major changes across the industry and the regulator is keen to ensure that consumers are still being protected.

DB transfers in particular are being very carefully examined. Over the last few months, we’ve seen several high-profile firms suspend DB transfers service following discussions with the FCA. Advisers are also increasingly wary of these transfers. Many who will advise on the transfers still worry that there may be repercussions if the transfer does not work out in the way the client hoped. 

For others, the main concern is insistent clients, and the possibility they could still be blamed for facilitating a transaction they have not recommended. 

Pension providers are also concerned about repercussions. Many will ask for advice on all transfers (rather than just those above £30,000) or need the investor to have a positive recommendation before proceeding. Such requests go further than the regulatory requirements, as providers want to make sure transfers are in the consumers’ best interests before accepting them.

If the volume of DB transfers declined, it would be unlikely to slow Sipps growth altogether, but could certainly be a contributing factor. If nothing else, the difficulties that can arise are already contributing to bad press, with consumers angry at needing to pay for advice in order to access the pension freedoms. 

Another area of increasing interest to the FCA is non-advised drawdown. Since the freedoms, unadvised consumers make up 30 per cent of drawdown designations – a six-fold increase from 5 per cent before April 2015. The FCA wants to mitigate the risk that many of these consumers will not know how to manage longevity and investment risk in drawdown. 

One of the key issues the FCA highlighted in its Retirement Outcomes Review interim report was mistrust. Its research found that mistrust was one of the main reasons behind unadvised consumers fully withdrawing their pension funds. 

The majority of full withdrawals so far have been from small pensions, with up to 80 per cent under £30,000 according to one study, but Sipps on average are more likely to be higher in value. Additionally, those opening new Sipps are more likely to be seeking the features of the pension rather than planning a full withdrawal. 

That said, mistrust is still a serious, industry-wide issue. If consumers are put off from pension saving due to mistrust, where will the next generation of Sipps investors come from?

There is another argument stemming from the FCA’s recent research, which concluded that the first group of consumers to use the pension freedoms are unlikely to be representative of later groups. The first two years of the freedoms have seen investors flock towards the new flexible retirement options, but will this continue long term? Perhaps, if and when stories of individuals running out of money for their retirement start to creep in, we’ll see guaranteed income products increase in popularity once again. 

Of course, using this as an argument against the continuing growth of Sipps ignores the possibility of developing guaranteed income solutions. The FCA discussed the lack of market innovation so far in the Retirement Outcomes Review report, and it’s possible it will take steps to encourage innovation in the future.

On balance – and simply put – it’s probably too soon to tell. Considering pensions are a long-term savings product, it’s easy to forget just how quickly and dramatically the rules have evolved. At the beginning of this decade flexible drawdown did not yet exist, and now we find ourselves trying to predict the long-term effects of its successor. 

Individuals who chose to delay taking benefits for only a few short years now face vastly different options and considerations. 

What happens next will depend on how all of these different factors develop. What’s clear is that the industry needs to find solutions that work for consumers, advisers and providers alike: for example, finding ways to support unadvised drawdown rather than restricting it. If it can rise to these challenges then the whole industry, including Sipps, has the potential to thrive. 

Jessica List is pensions technical analyst at Suffolk Life