Remember, IPAs are not new pension vehicles in themselves but sit inside any one of the defined-contribution schemes. Shares and unit trusts held inside IPAs will be tax-exempt.
The Treasury suggests much synonymity between IPAs and stakeholder pensions. It seems convinced that IPA managers will have no problem finding suitable investment funds – in many cases their own – to comply with stakeholder charging structures.
It will be essential, if the IPA is to take off, that charging in the IPA matches or improves that expected under DC pension schemes.
For fund managers intending to promote their products within pension wrappers, matching the charging structure expected by the pension wrapper (stakeholder or not) should not cause a problem. However, it will be important that there are no or minimal IPA management charges on top.
Although the IPA is founded on a contractual relationship, there will nevertheless be another layer in the overall arrangement. Where the IPA manager is the same as the pension scheme manager, the potential for extra charges should be minimised. The investor will be looking at the overall composite charge. It is thought that lower composite charges will be more feasible when the pension scheme manager and IPA manager are the same, as they are likely to be for most fund-based schemes.
The stamp duty reserve tax reduction will certainly help to achieve the objective of low charges.
SDRT is charged when units in unit trusts and shares in Oeics are redeemed and are matched within a certain period by issues of similar units or shares. Transactions of this kind are likely to be the usual way to make significant adjustments in the investment exposure of savings held within an IPA. Such changes in exposure could reflect the ageing of the pension saver or simply a change in assessment of the most rewarding sectors in which to invest.
However, economically-similar adjustments in units in a life fund would not attract SDRT in this way. Pensions which take the form of life policies invested in unit-linked funds could make equivalent investment adjustments without paying SDRT, so collective investment schemes held within an IPA could be at a competitive disadvantage.
The Government therefore intends to exempt such transactions from SDRT when they occur entirely within an IPA. This should ensure that pension savers can readily take advantage of the flexibility of the IPA structure. The exemption will apply both where units in one fund are redeemed in order to buy units in another fund within the same IPA and where units in one IPA are sold to buy units in another IPA for the same pension saver.
The Inland Revenue plans to consult shortly on regulations to achieve this exemption. The plan is to put the exemption in place ready for the launch of stakeholder.
Perhaps this is the most discernible advantage of an IPA – a tax saving of 0.5 per cent will be secured. It is understood that investment trusts will be pushing for a similar reduction.
IPAs themselves will not be regulated although the underlying investments will be. In this respect, the IPA – a contractual arrangement between the IPA manager and the investor – will look like a nominee arrangement. Investments are wrapped by the IPA and the IPA is wrapped by an appropriate DC pension structure.
Because each IPA must exist within a pension scheme, each IPA manager must have a relationship of some sort with the pension scheme manager. This could take a number of forms:
The IPA manager could be the same firm as the pension scheme manager.
The IPA manager could be a different firm within the same corporate group.
The IPA manager could be independent of the pension scheme manager.
The Treasury sees no reason why each of these sorts of IPAs should not flourish.
As stated above, IPAs will not be regulated investment instruments. For the avoidance of doubt, IPAs will not constitute collective investment schemes, like Peps and Isas.
The Treasury does not plan that the activity of managing IPAs will be specified as a separate activity in the Regulated Activities Order under the Financial Services and Markets Act. Providing this service will simply be a subset of managing investments.
Of course, the Treasury will consult on the RAO itself in due course. Once these provisions are in place, the FSA will issue firms seeking to be IPA managers with the appropriate permissions.
It will be essential that the three layers of investment fund, IPA wrapper and pension wrapper do not create higher-than-necessary charging or lower-than-desirable profits. The most obvious – although not necessarily only – way to ensure this does not happen is for all three functions to be performed by the same group.
It has also been suggested that IPAs could be used inside life insurance products. This would not be a novelty since unit trusts and investment trusts have, for many years, represented the underlying investments of life insurance.
In a pension context, the tax issues should be neutral, so whether the outer wrapper is an insurance company-provided DC pension or that of some other provider ought not to make much difference. The key issue will be costs and charges.
It is noted that an IPA may be a flexible, good-value investment for a period of income drawdown.
The IPA ball is now well and truly rolling. For many fund managers, this means that pension provision – or, more interestingly, the provision of flexible, future financial security provisions using appropriate wrappers – will move up the agenda of importance.