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Putting Sipps to work

Recommending a group Sipp after A-Day will require special considerations

Group Sipps are becoming big news but I urge financial advisers to think through the implications before recommending them to any particular corporate client.

A group sipp is essentially an amalgamation of two existing contracts – a group personal pension, which is a bundled use of personal pensions in the workplace, and a self-invested personal pension, which can invest in a wide range of assets, not just insurance policies.

The driver behind the development of group Sipps is the new pension tax regime which starts on April 6, 2006 and during the next year I expect to see group Sipps beginning to take over some of the new GPP territory.

Despite the unexpected Treasury U-turn on the freedom of Sipp investments, there is still considerable potential investment flexibility. Direct investment in residential property through a Sipp may no longer be possible but it can still be done on an indirect pooled basis and commercial property investment will be possible directly or indirectly.

Additional flexibility will come from the removal of the ban on transactions with connected persons. A Sipp will also be able to borrow up to 50 per cent of the value of the pension pot to get leverage on the investment and will be able to invest directly in the stockmarket.

But how many people in the workplace will wish to take on the responsibilities of private investment? For most people, I expect that the self-invested element will remain dormant.

The benefit of a group Sipp is that any member can decide to activate self-investment at any time without having to move to another pension vehicle. It is like a water meter. You can turn on the tap whenever you like and only pay for the self-investment facility when you use it.

Self-investment will appeal to some members more than others but even the more financially sophisticated members will need support. It is important to step up advice when self-investment is being contemplated. Crucially, people must gauge their attitude to risk so they can properly assess the risks and potential rewards of an investment in the context of their own financial circumstances. A surprising number of people will say they have a high attitude to risk when, in fact, they really mean that they want high investment returns but cannot afford to lose the money if it goes wrong.

Financial advice and the use of investment profiling and modelling tools should help to ensure that the right people opt for self-investment and choose the most suitable investment mix.

Any transitional protection of tax-free cash in a group Sipp as a result of a previous block transfer will not be lost on activating the self-administered element, whereas it would probably be lost on transfer from a GPP to an individual Sipp. The full flexibility and benefits to the employee of the GPP will still be available with a group Sipp including streamlined joining or auto-enrolment where appropriate, life cover paid for by the employer and payroll deductions.

Group Sipps and GPPs should be ideally placed to adapt to whatever the Government’s review of pensions brings in the light of Lord Turner’s report.

Turner states that a good workplace scheme will be able to opt out of the National Pension Savings Scheme, provided contribution levels are sufficient and it operates auto-enrolment. A good group Sipp should meet these criteria with the added advantage of not needing two separate schemes, one for the financially sophisticated and one for the rest.

But advisers need to be clear how the additional individual advice is going to be provided and paid for, before they advise a corporate client to go the group Sipp route. If they only realise that there is an advice gap when somebody says they are going to use Sipp flexibility to do complex and potentially inappropriate things, it may be too late to prevent a debacle.

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