One cannot overstate enough how big of a deal it was 30 years ago when rules were introduced to allow people to manage their pensions and choose where to invest them.
In those three decades, self-invested personal pensions have gone through big changes as a result of regulation, the prevalence of technology and consolidation.
When the Financial Services Compensation Scheme announced that its final levy for 2019-20 was going to be £16m more than forecast, it blamed some of the increase on the number of claims expected against Sipp operators.
The bulk of the pension claims it expected in 2019-20 would continue to arise from bad advice to transfer retirement savings out of occupational schemes and into Sipps – usually with a view to investment in risky and illiquid assets.
Tom Selby, senior analyst at AJ Bell, says: “It’s been a difficult thing for legitimate providers to avoid being tarnished with the same brush as other providers, who allowed all sorts of esoteric investments that have not worked out into their Sipps. The problem has never been with the Sipp.
- Sipps have gone through enormous change since they launched in 1989.
- They have benefited from big changes in pension legislation.
- There are far fewer Sipp providers than there used to be.
“The Sipp is just a tax wrapper used to allow people to invest in things they want in a tax-efficient way. The problem has always been the investment at the other end of the product and the due diligence providers have or have not done on those products.”
Sipps were first introduced in the 1989 Budget. A Joint Office Memorandum later that year established which investments were permitted investments.
Further regulation followed, and on A-Day on 6 April 2006 Sipps became registered pension schemes. From 2007 they were regulated by what was then the Financial Services Authority.
The main advantage of a Sipp over a traditional personal pension is the level of investment flexibility the member has.
The range of available investments is much wider than a standard personal pension and may include: UK and overseas stocks and shares; unlisted shares; unit trusts; investment trusts; open-ended investment companies; investment-grade gold bullion; and commercial property, among many others.
They started out as a way for high-net-worth clients to invest in sophisticated investments. They were subsequently made accessible for the mainstream, but they were then abused, as unsophisticated investors were mis-sold into putting their money into questionable investments, which inevitably ended up failing.
Running a tight Sipp
There are now capital adequacy requirements for Sipp providers, which means those holding more esoteric assets need to have more capital in reserve. These rules were introduced in 2016 by the regulator and were designed to ensure a company can wind-up in an orderly fashion.
Mr Selby says: “It was really the demise of defined benefit pensions in the workplace, after the 1989 Budget, that really saw personal pensions and Sipps start to see increased take-up and popularity in the UK.
“Those initial versions of Sipps would have been quite niche products. They would have entirely been sold by IFAs and very much focused on high-net-worth customers; nothing like the mass market of Sipps you see today.”