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by HM Revenue & Customs (HMRC) in July showed that the second quarter of 2017 set a new record for the value of funds withdrawn.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.