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Top tailors

Low-margin business, unsustainable, say IFAs, ran the headline in the February 7 issue of Money Marketing.

The news story recounted how 75 per cent of the 280 independent advisers canvassed in the recent Money Marketing/Virgin One State of the IFA Nation poll did not see mass-market business as a viable option. Instead, they saw their future lying “in more specialist areas and advising high-net-worth clients who need tailored individual financial planning services”.

In the pension arena, this translates into counselling the people at the top, the business owners and decision makers, rather than offering face-to-face advice to employees lower down in the company hierarchy.

Clients of this genre tend to be financially sophisticated individuals looking for retirement planning solutions that can be tailored to meet their circumstances and needs. This will often mean small self-administered schemes and self-invested personal pensions rather than off-the-peg executive pension plans and more basic personal pensions.

The Ssas is an occupational pension scheme while the Sipp comes within the Inland Revenue personal pension/stakeholder rules. What is more suited for a client is for IFAs to apply their professional judgement to decide.

Members of partnerships – including accountants and solicitors – and sole traders can only opt for the Sipp while directors of private compan-ies and others who are taxed on schedule E can choose between the two.

SSASs have been around for longer than Sipps but the market for Sipps is currently benefiting from the popularity of personal pension income withdrawals.

Whatever happens in the compulsory annuity versus lifetime drawdown debate, high-net-worth clients – including those transferring from occupational schemes – with vesting funds in the hundreds of thousands, if not millions, of pounds will continue to opt for greater flexibility and take regular withdrawals from Sipps.

The attraction of both types of arrangement is the breadth of investment choice on offer.

Acting closely with their IFAs, the clients make the key decisions. They are the ones in control. Both SSASs and Sipps enable the trustees to own the premises from which the business trades.

The Ssas rules go further by allowing the scheme to lend money (on commercial terms) to or own shares in the employing company. There are strict limits governing “own business” investment, which is just as well as the directors and shareholders of a private company might be tempted to plough all their pension fund into their business.

Where should the trustees consider placing the balance?

The choice is extremely wide and includes directly held stocks and shares traded on the UK and recognised overseas stockmarkets and also on the alternative investment market; unit trusts, Oeics and investment trusts; life insurance company unit-linked funds and deposit accounts.

It may be tempting to invest in stocks and shares directly but there are strong arguments for choosing the indirect unit trust, Oeic, etc, route.

The advantages are clear. They include access to the global fund management skills and research resources of a major dedicated investment house, a wide range of specialist and general portfolios from which to choose, greater diversification with the resulting reduction in risk and the simplification of accounting and record-keeping.

For SSASs, there is also another benefit. As occupational schemes, the trustees have to declare their investment principles to their members who, alongside the pensioner trustee, are usually trustees themselves. Although they cannot do this for directly held stocks and shares, they can for a collective fund such as a unit trust or Oeic.

However, there is one major problem with this approach. Unit trusts and Oeics are not as tax-efficient as a life insurance company&#39s unit-linked pension funds. They have to bear stamp duty reserve tax while the life insurance company funds do not. This was an anomaly which that one-time Government favourite, the individual pension account, was supposed to put right.

Although it might appear that the specialist investment management house, with its range of unit trusts and Oeics is at a disadvantage in the Ssas and Sipp investment stakes, there is a solution which does not involve developing an IPA from scratch. Instead, the institution can offer access to its collective investment funds via a special unit-linked pension policy issued by its own in-house life insurance company.

The contract is a trustee investment policy. I realise that Tips are not new. Traditional life offices have been offering them, first as investments for SSASs and later for Sipps as well, since the early 1980s.

The key difference is that IFAs tend to recommend the retail non-pension products (Isas, Pep transfers and dir-ectly held unit trusts and Oeics) of the specialist fund management houses to their high-net-worth clients.

Now, thanks to the Tip wrapper, they can recommend the same funds as holdings for SSASs and Sipps as well. What is more, they can do this on a level fiscal playing field with traditional life office funds.

These dedicated fund management houses do not have to set up life insurance company subsidiaries specifically to write Tip business.

The truth is that they have been running such companies for years for their institutional pension scheme clients.

It is simply a case of adapting the product offering to fit the needs of IFAs operating in the SSAS and Sipp market.

Tips come with an additional advantage – for the trustees, there is less paperwork than would be required for direct investment into the underlying funds.

These Ssas and Sipp investment products are competitively and transparently priced and independent advi-sers can choose how they are to be remunerated.

Some may prefer initial plus trail commission. Some, who run a fee-based practice, may opt for a nil-commission/ enhanced unit allocation basis. Others may choose something between the other two.

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