Pensions have certainly taken a bit of a battering in terms of public opinion over the past few years. In June last year, Steve Webb, the industry’s own minister, said that pensions had a “bad reputation”. The perception has been of an industry full of deficits, struggling funds, low annuities and a generally complicated, opaque and hard to understand system. All this has made it very easy for people to switch off at the mention of pensions, but with the announcements made in the Chancellor’s 2014 Budget, some industry commentators believe this could change. And certain parts of the market will feel the positive impact more than others. After all, with a far greater emphasis on drawdown, the self-invested personal pension (SIPP) is likely to grab defined contribution investors’ attention.
“The great thing is that this changes the whole attitude to pensions overnight,” says Sippchoice managing director Hyman Wolanski. “People have had a very negative attitude towards pensions because they did not understand them. Now they do. It’s become easier. People are being treated like grown-ups and there is a real change in attitude. Before, people were reluctant to put money into pensions because they did not know if they would get it out again. Now, they know they can get their money out so there will be more incentive to invest.”
With the headlines shouting of “radical reforms”, “greater freedom” and the odd mention of a newfound ability to potentially blow your pension pot on a Lamborghini, the Chancellor’s changes have thrust pensions into the spotlight. But while there has been some concern that people may not manage their new freedom properly, many within the industry believe that savers are more sensible than that. “It’s very positive news,” says Prudential head of business development for retirement income Vince Smith-Hughes. “Over the course of the last few years pensions have had their fair share of bad news, so this is a real boon.”
To recap some of those game-changing announcements, from 27 March, the government increased the lump sum allowance from £18,000 to £30,000, and reduced the amount of guaranteed income needed in retirement in order to be allowed to access flexible drawdown. The limit will fall from £20,000 to £12,000 a year. Further changes are under consultation, and due to come into force in April 2015, when it is proposed that people who are 55 or older will pay their marginal rate of tax on withdrawals from their defined contribution pensions, instead of the current 55 per cent rate.
And crucially, also from April, people aged 55 or over will be able to take their retirement money however they want, subject to their marginal rate of income tax in that year, with a 25 per cent chunk of their pot remaining tax-free, and this regardless of the size of their DC pension pot. The proposals mean that DC members will be able to leave their pension invested and drawdown from it over time, or take the lot out and do with it what they will, or buy an annuity if they wish.
In one fell swoop, then, pensions have arguably become more attractive. And this may be particularly the case for SIPPs, with the focus placed firmly on flexible drawdown and accessibility, one of the elements of the product that offers the greatest appeal. James Hay head of technical support unit Neil MacGillivray says: “SIPPs have a head start because they already offer flexible drawdown.”
For a long time, the SIPP remained a niche product that appealed mainly to experienced investors with large pension pots, but over recent years the rise of the so-called low-cost SIPP and a more accessible approach has brought them further into the mainstream. And their drawdown facilities tie in well with the Budget changes.
SIPPs may not be alone in offering drawdown facilities – indeed, Wolanski explains: “Technically there is nothing to stop a DC scheme operating drawdown, so if they do that there is no need to come into SIPP.” Nonetheless, the way the product is designed certainly seems to make them a good fit for DC savers looking to make use of the Chancellor’s pension changes.
Filling the gap
After all, with annuities no longer necessarily a central part of pension planning, something needs to step in to provide access to income. According to the government, three-quarters of people bought annuities under the out-going system, with Association of British Insurers (ABI) figures showing an average fund worth £35,000. On the Chancellor’s announcement that buying annuities would be optional, the market was quick to thumb its nose at the providers. The Daily Telegraph reported that £4.4 billion had been wiped off the value of insurers in the wake of the news.
And although some predict annuities could improve their offering and encourage their fair share of buyers looking for a regular income, in the meantime people who are retiring will be looking for a suitable and attractive place from which to get their flow of cash. “We have been having interesting conversations with advisers,” says Smith-Hughes. “They are thinking about how to create a sustainable income stream and trying to think up strategies. It will be difficult to fulfil that role, and I think SIPPs will be a big part of that.”
The need for good advice
For Wolanski, though, the most important motivation for opting for a SIPP should be the doors it opens onto a different style of investment and a wealth of asset options. “You should have a SIPP because you want the investment opportunities,” he says. The ability to invest in all manner of assets, from commercial property through to commodities, gives pensions investors an impressive range of choices, but perhaps for many that variety could be overwhelming. Used properly, they could provide necessary income as well and act as a tax planning tool. But not everyone is equipped to make the best use of them.
For this reason, says Smith-Hughes, the role of advisers will be crucial. The SIPP may be the right choice for some DC members, but it is important to understand the product, how it is invested and how to best make use of the funds: “It could be too broad for some people to make a choice on their own without advice. The choices are endless - even for someone with a relatively modest fund, if you want to take it all at once, why not take it over three years?” Indeed, he says, for a lot of people there will be significant benefit in combining approaches. “With retirement choices it is not just A or B, it could be A and B. It may make sense to buy an annuity and to leave some invested. I would say trustees should consider getting financial advisers in to discuss options.”
The government has included plans to make guidance available, and is consulting on a new obligation for pension providers to offer guidance to DC members at retirement age. Announcing the proposals, the government said: “To help people make the decision that best suits their needs, everyone with a defined contribution pension will be offered free and impartial face to face guidance on the range of options available to them at retirement.”
For trustees, then, as ever communication and advice will be vital parts of planning in preparation for the changes that look set to further shake up the landscape in 2015. And with only a year to go before the bulk of the changes are due to roll out, it is important that trustees act quickly to put the right frameworks into place. While there is still some detail to be ironed out, and questions to be asked about how companies will put the new pension rules into play, the SIPPs industry is enjoying a moment of rather positive energy in the wake of the 2014 Budget. As James Hay’s MacGillivray puts it: “It’s manna from heaven for SIPP providers.”
Sandra Haurant is a freelance journalist