Sandra Haurant explores how the SIPP and SSAS industry is evolving

At a time when people are keen to gain a tighter control over their own finances, it is perhaps not surprising that self-invested personal pensions (SIPPs) and small self-administered schemes (SSAS) continue to appeal to investors.

Since A-day in 2006, SIPPs have somewhat overshadowed the original self-invested scheme, its cousin SSAS. When it comes to the investments that can be held within the two products, there is a lot of shared ground. But by their nature, SSAS have more of a niche market. The small company pension scheme particularly benefits company directors and key staff. SSAS are owned and run by their members, and although it could be said that SIPPs have been stealing their thunder, some argue this form of pension is making something of a comeback.

Like SIPPs, SSAS give greater control over the types of investment that are held within them. But what sets them apart is the facility they offer to lend money back to their founder company. These loan backs have to meet certain criteria set by HM Customs and Revenue. They should not be above 50 per cent of the net market value of the scheme’s assets, they have to be secured against assets of an equal value by way of a first charge and the term of the loan cannot exceed five years. The interest rate charged on the loan has to be a minimum one per cent above the bank of England base rate. But, according to Dentons Pension Management director of sales and marketing Martin Tilley, this facility is attractive for a number of reasons.

“The best a scheme can get if it invests in cash is between two per cent and 2.5 per cent,” says Tilley. “The minimum a loan will pay back is one per cent above base rate, but in fact in most cases the rate is paid at around 3.5 per cent, giving a very good rate of return.” And at a time when getting credit from banks is extremely tough, this facility is appealing to an increasing number of schemes, says Tilley. “Lending is down as banks are finding it hard to lend to small companies. Through this facility it is possible that the companies get cheaper credit from their own pension scheme than from the bank.”

Of course, the loan back facility needs to be used with caution. Defaqto insight analyst for wealth management Andy Leggett says: “It is important that borrowing is done for the right reasons. It cannot be a last chance saloon, and interests have to be well aligned and not in conflict.”

Nonetheless, Tilley says the firm is seeing a lot of customers return to SSAS. “Journalists are picking up on the loans facility, and practitioners are sharpening up when it comes to SSAS.” And, says Tilley, in terms of cost there is not a huge difference between the SSAS and SIPPs. “Running a four or five-man SSAS is not very different in terms of cost from running a group SIPP, and certainly cheaper than individual SIPPs.”

There are around 40,000 or 50,000 SSAS, according to Mattioli Woods marketing and sales director Murray Smith. However, it’s hard to pin down the exact sales figures for SSAS to detect any real increases or decreases in the product’s popularity for a variety of reasons, explains Tilley.

Firstly, since 2006, the products are no longer required to appoint a pensioner trustee and a lot of SSAS now operate without one. There is no way of tracking schemes without a professional trustee. As occupational schemes, SSAS are not regulated so they do not report to a central body, which means there is no organisation verifying numbers. And while there are surveys in place, not all practitioners take part so the figures could be skewed.

To gain a better idea of the SSAS market, Tilley asked a number of questions to practitioners at the Association of Member-Directed Pensions’ (AMPS) AGM, which were answered in an anonymous vote. The results showed that while 11 members had seen SSAS books fall since A-day, the majority had seen them remain static or increase, with 16 saying sales had increased by more than five per cent. Four reported growth of more than six per cent and four more than 11 per cent.

Of course, by comparison SIPPs have seen a meteoric rise. The FSA’s product sales data shows the volume of SIPPs sold at 38,000 in 2007, following regulation by the FSA, rising to more than 188,000 in 2010. Indeed, sales of SIPPs look set to outstrip those of personal pensions as soon as next year, and there are around 700,000 SIPPs in existence, according to Mattioli Woods’ Smith.

The reasons for this growth are varied, explains Leggett. “FSA sales show there is still strong growth. I think there is a general trend, people are having to take more control over their investments, and that is actually what SSAS and SIPPs are all about.”

Suffolk Life head of marketing Greg Kingston agrees. “People like the control and visibility with SIPPs. They feel close to the assets.”

And while SSAS are attracting attention because of their loan facilities, SIPPs have their own unique advantage in the form of drawdown. After the age of 55, the SIPP holder can draw down a 25 per cent chunk of the pension fund as a tax-free lump sum. They can then use the rest to buy an annuity or use the money to provide an alternative secured income. At a time of historically low interest rates, when annuities are perceived as being poor value, these benefits on retirement can be very appealing.

For Kingston, there is also an element of ‘bandwagon jumping’ when it comes to the popularity of SIPPs. “Since the regulation of SIPPs there has been an increase in products being marketed as SIPPs which would barely qualify as SIPPs,” he says. Indeed, SIPPs, once purely bespoke products and the preserve of the high net worth, sophisticated investor, are being sold in a variety of shapes and sizes to spread their reach to a far wider group of investors, says Grant Thornton partner and head of financial planning Neil Messenger. “SIPPs have become a mass market product from something that was quite niche,” he says.

Smith would not go as far as to call SIPPs mass market products just yet, but he agrees that they have broadened their appeal significantly, and perhaps even to the detriment of the industry, which could do without a misselling scandal. “SIPPs are being used as sales speak to sell a product that is not really a SIPP, says Smith. “What they are often offering is actually a hybrid between a true SIPP and a personal pension, but that hybrid is still being called a SIPP.”

Indeed, Smith says that there are now three categories under the banner of SIPP: full bespoke products, hybrid products and commodity-based products. “There is really an element of ‘buyer beware,’ and people must drill right down into the SIPP provider to see what is really being offered,” says Smith.

But while the recent past has been characterised by growth for the SSAS and SIPPs markets, some believe the future may be tougher. For one thing, many feel that sales of high-end SIPPs may be on their way to saturation. Furthermore, fees on SIPPs have been kept to a bare minimum recently, and current structures may be unsustainable following the retail distribution review (RDR) which comes into force next year.

Smith says: “Many are not making a lot of money at the moment, and some are on a knife edge. The market has shot itself in the foot in some ways in an effort to keep fees down. But costs are going to have to rise.”

Messenger agrees: “If you take the average SIPP, most do not charge a fee. But providers will not be able to pick up commission rebates after RDR next year.” Potentially, then, higher fees could take them back to where they started, reserved for those investors who can afford bespoke schemes.

Written by Sandra Haurant, a freelance journalist

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