What do you see as the pros and cons of being able to put residential property into a pension?Morrison: This is definitely one of the highlights, at least from a client perspective, of the new simplified pension regime. I know from my discussions with financial advisers that many clients are attracted by the ability to buy residential property.I think we might look at all possible pension assets in the light of their investment potential and, over the last few years, at least residential property does stand on its own two feet as an asset class. There has been a positive return. However, in terms of not regarding it as an investment but as a way to get on to the housing ladder, other issues such as liquidity must be taken into account. McPhail: The freedom to diversify asset allocation is welcome, as is the increased interest in pension investing which it will undoubtedly generate. I am not convinced that, for the investor, investing in residential property via a pension will prove to be as much fun as some recent headlines have suggested. There are growing signs that self-invested personal pension companies are not enthusiastic about the risks involved and, as a consequence, the investment returns may be diminished by heavy compliance costs. Naismith: The main benefit is that it may encourage people to save more in pensions. However, the risks are not well understood and members could lose heavily if the market crashes. The house will not belong to the scheme member and there could be difficulties if a proposed change, for example, a new conservatory, is not approved by the administrator. In any event, there will be significant administration in periodic valuations, and so on, and potential problems at retirement. Savers will be able to put such items as stamp collections, art and wine into their pension. How do you view such investing?Morrison: I am not denying that some of the more specialist investments can produce good returns but they are specialist. There will be the extra costs of setting up arrangements to administer such investments, as well as storage, valuation and insurance, to name but three. I cannot see it being a mainstream offering. McPhail: This is not something I could claim any experience in, other than as an end user. If it stimulates investor involvement in pensions by exploiting their personal interests, then I am all for it. In the majority of cases, such esoteric investments should be confined to the margins of an investment portfolio and there will be ever more creative ways to lose money, as well as make it. Naismith: Wider investment choice will encourage people to save more in pensions but it also introduces a number of complications. In particular, the Inland Revenue is very likely to levy taxes on such assets unless it can be demonstrated that they are purely an investment and that the individual derives no other short-term benefit from them. There is also some doubt over how many Sipp providers will permit them. With A-Day just over a year away, what are you doing specifically in terms of preparation for pension simplification and what are the biggest potential pitfalls when it goes live?Morrison: As a pension provider, we must design products with the new regime in mind. We must also communicate information to our existing clients. I think it is also our role to educate and inform IFAs on the new rules and the opportunities, as well as the pitfalls. At the worst, for some clients, if they are not advised appropriately, they may incur an extra tax charge. McPhail: In terms of preparation – staying on top of the business opportunities as they evolve, filtering and extracting the most important information and making sure that it gets communicated to the right people. Group pensions, Sipps, decumulation products and term insurance will all feature. The biggest pitfalls are getting distracted by the wrong opportunities and failing to get all the internal systems working properly. Naismith: We have set up a major project to ensure that all the required systems changes are in place and that we communicate effectively with our customers. We are also developing plans to take advantage of new opportunities, especially in the post-retirement market. The biggest pitfalls are that individuals with the protection of existing benefits may lose this unwittingly, through transfers, where tax-free cash is protected, or paying more in, where there is enhanced protection. In light of the UK’s pension crisis detailed in Adair Turner’s report published last year, do you feel that people are now taking a more active and healthy approach to their pension?Morrison: There does seem to be some enthusiasm coming back into the market. A number of financial advisers that I have spoken to recently have reported a renewed interest in pensions. This may be down to the new rules, more positive investment returns or perhaps even the fact that people have at last taken notice of all the scare stories. McPhail: Awareness is definitely increasing, thanks to the relentless attritional warnings of dismay and penury awaiting the unwary. We have a long way to go, though, and any celebrations at having achieved a state of conscious incompetence should be suitably restrained. Naismith: There is little current evidence of any change. To improve the situation materially, we need a review of state pensions, increased incentives to save and an effective education and communication programme. Do stakeholder pensions have a future?Morrison: Currently, pensions have to be sold and are not just bought. This means that it must be worthwhile for some to sell them but the price cap causes problems here. Perhaps the focus should be on value as opposed to cost. I am not sure that stakeholder will ever really succeed, with the possible exception of employer-sponsored schemes. McPhail: They will no doubt be of some interest to pension archaeologists in years to come. The world has moved on from low cost at any price to a recognition that distribution and investment freedom cannot be ignored. Without compulsion, and given the environment into which stakeholder pensions were launched, they were always going to struggle. They have not disappeared yet and an unexpected flanking manoeuvre by the Treasury could yet push them back to centre stage but I think it is unlikely. Naismith: Yes, but the market is shrinking. Stakeholder pensions still offer excellent value for money. However, advisers may increasingly turn to personal pensions because there is more scope to pay for a full advice process within the charging structure. We expect to see a much greater differentiation between personal and stakeholder pensions in the future. There is widespread recognition in the industry that means-testing is a disincentive to saving. If it is here to stay, what can the industry do to combat its negative impact?Morrison: Mean-testing is a disincentive and works in such a way that the people who will suffer the disincentive will not realise how the system works. Perhaps it is incumbent on us as an industry to explain in simple terms what might happen to savers who commence saving small amounts into pensions. Ideally, the whole system needs review – and soon. McPhail: It is not here to stay, which is a good thing, but it will probably be around for a few years yet. So, for the time being, we have to learn to live with it. My own feeling is that if the extra complexity of means-testing renders a market segment uneconomic to deal with, then go and make money elsewhere. Means-testing certainly should not be ignored, though, and any dealings with a client who may be affected by it should involve suitable disclosure of the implications of Government policy. Naismith: Means-testing is mainly an issue for those who are close to the end of their careers and have little or no retirement provision. We believe its extent must be reduced to revitalise pension provision. However, if there is no change, the industry response must be to encourage younger people to make sufficient provision for it not to be an issue for them. However, that will still leave a generation who have inadequate provision. Mike Morrison,pensions strategy manager, WinterthurTom McPhail,pensions research manager,Hargreaves LansdownIan Naismith,head of pensions market development, Scottish Widows
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