And when it comes to pensions for those who are earning, surely ‘business as usual’ must be the only sensible rule, recession or no recession? Investment strategies have had to change radically, of course. However, the low levels of return that are generally available, particularly from investments offering security of capital, make it all the more vital for individuals to maximise their pension contributions during this difficult period, in order to support the value of their plans. This will minimise the impact of today’s recession on their future retirement income.
However, it is not simply a case of investors needing to grit their teeth and divert resources from other priorities in order to safeguard their pensions. With all sectors depressed and volatile, and likely to remain so for some considerable time, the tax relief available on qualifying contributions means that, for most investors, personal pensions – and Sipps in particular – currently offer the best real return available by a considerable margin. When High Street and online deposit rates mostly range between 1.25 per cent and 3 per cent as they do at present, then the 40 per cent uplift provided by pensions tax relief for higher rate taxpayers (20 per cent for basic, lower and nil rate taxpayers) is equivalent to as much as 10 years or more of superior returns – even before any additional earnings from investment.
This alone should be a good motivator for investors with adequate reserves of liquidity to direct available funds into their pension plans, rather than into other forms of investment – for the time being at least.
The reason for saying that the current environment favours Sipps, in particular over proprietary PPPs, is that the additional flexibility of Sipp gives investors and Advisers the freedom both to take quick defensive action when called for and to take advantage of the short-term opportunities which can appear even in a recession. These may arise either through the markets or as a result of special offers. In the case of James Hay, for example, over the last year we have been able to launch three issues of structured products designed to provide our Sipp holders with the potential for relatively high returns and security of capital, and we anticipate that similar offerings to these will be a fairly regular feature of our business over the next few years. That same flexibility also means that Sipp investors – not least because they are also more likely to have the active support of an Adviser will be better placed than most others to reap the full benefits of renewed market activity in the early stages of the eventual economic recovery.