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Sipp sirens

Helen Monks assesses the massive shift in business since A-Day to self-invested personal pensions

Business figures for single-premium individual pensions leapt by more than 70 per cent in the second quarter to £7.2bn from £4.2bn last year.

The Association of British Insurers attributes the rise primarily to a change in the timing of the payment of Department for Work and Pensions rebates, with payments being made earlier in the year.

But advisers and providers believe the figures reflect not the growth of Sipps and the general demise of regular-premium business.

Recent research by Sipp provider Alliance Trust shows 64 per cent of advisers report an increase in Sipp business since A-Day in April 2006 and 21 per cent say Sipp volumes have risen by a massive 50 per cent.

There is a debate over how the Sipp boom might be distracting the pension industry from the problem of the retirement savings gap and how far clients buying Sipps need the flexibility and associated higher charges of the product and whether inappropriate Sipps are being missold by advisers or misbought by investors. There is also the question of whether some Sipps are true Sipps, with all the investment options this type of pension can offer, or are just personal pensions in disguise.

The spectacular rise in the amount of single-premium business might look encouraging but few people in the pension industry believe it signals a golden age of saving for retirement.

Scottish Widows research shows confidence is starting to return to the pension sector but only 49 per cent of people are saving adequately for retirement, with 24 per cent not saving at all.

Royal London group head of communications Alasdair Buchanan says: “Interpret-ing new business figures can be difficult but it only takes a scratch of the surface to reveal that the latest ABI figures are not evidence of a new savings culture but demonstrate that, since A-Day, advisers are justifiably moving their clients into new pension contracts with better terms.”

Standard Life head of pensions policy John Lawson argues that the increase in single-premium pension business points to a greater shakedown.

He says: “The DWP factor is just a blip. There is a big restructure and a longer-term trend towards single-premium business and away from regular-premium business which is less certain and less profitable. It might take 10 years to reach break-even point on regularpremium contracts whereas single-premium contracts allow for the recouping of commission costs much earlier.”

Buchanan says: “Sipps have attracted a lot of attention – they are seen as sexy, they are more interesting than personal pensions and they are not tainted by previous misselling.”

But, of course, these factors are not enough for an adviser and there are widespread fears among advisers and providers that Sipps are not always being used appropriately leaving the financial services sector facing the spectre of misselling allegations.

SG Wealth Management executive director Neil Shillito says: “Sipps are complete overkill for many people, they are too complex and too expensive – a sledge-hammer to crack a nut. The industry wants to oversell Sipps because it creates a chance to grab pension holdings by transferring them unnecessarily into a new Sipp product. The obvious question is – to whose benefit?

But advisers also argue that investors also need to take some responsibility.

Shillito says: “There are huge numbers of investors out there paying into a Sipp where it is a completely inappropriate product and in many cases it is no one’s fault but their own.”

Dennehy Weller managing director Brian Dennehy says: “There is misselling and misbuying. We get quite a few people calling us up with as little as £3,600 to invest, asking for a Sipp. They do not know why they want a Sipp, they just say they want one.”

Vantis Financial Management director Steve Harvey says: “We have been approached by a number of people who think they want a Sipp because that is what they have read about in the press. They like the idea of managing their own pension investments but fail to take into account associated costs and whether the potential benefits merit the sometimes high outlay.”

Fund size is important when deciding if it is appropriate for a client to go for a Sipp. Anyone with funds under £50,000 could be considered to have little need for a Sipp. The self-invested route can be best left for clients with relatively complicated investment needs.

Dennehy says: “I have a feeling that a great many Sipps investors are invested simply in, say, managed funds. For these people, you have to ask why, for example, they have not been recommended something like the Scottish Widows’ stakeholder which offers 70 to 80 of its own and thirdparty funds with annual management charges at 1.5 per cent or below?”

Lawson reckons that as much as 95 per cent of all Sipps are in insured funds but makes the point that only 39 per cent of Sipp money invested through Standard Life is held in such funds.

Specialist providers have raised concerns over Sipps which do not offer the maximum flexibility.

James Hay propositions and e-commerce manager Chris Smeaton says: “Some bigger institutions are regurgitating their stakeholder propositions in the guise of a Sipp because it allows them to charge three or four times more for the same offering.

“Since A-Day, the rise in commoditised Sipps has lead to the proliferation of diet Sipps – Sipps with low charges offering limited functionality.

“We, as specialist providers, have a role to play in terms of educating investors that while you get the, full-blown full Monty through our offering, you might not be getting all that you think you are at some of the bigger pension companies.”

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