Changes to the pensions regime on A-Day have opened up some terrific opportunities for IFAs and their clients

31 August 2006

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SIPPs have been in the news a lot during 2006. Changes to the pensions regime on A-day have opened up some terrific opportunities for IFAs and their clients. Many now see SIPPs as the way forward for their target market of clients - that is, professionals and wealthy individuals looking for greater freedom, flexibility, control and value for money.

 

The "simplified" pensions environment introduced on A-day has already led to strong growth in this market. People are more aware of SIPPs, thanks to months of coverage in the national press (although mainly centred on the Chancellor's U-turn in relation to exotic investments). They don't know all the rules, but have a generally favourable impression of what they are likely to be. So, when you tell them about the attractions of a SIPP they should be highly receptive.

 

One of the biggest reasons for the growth in SIPPs is that anyone in employment can now have one. That's not to say that they are suitable for everyone - or that the level of contribution they can afford will be enough to make them viable. It does mean that, when talking to higher earning staff in a company pension scheme, you can recommend a SIPP as an attractive alternative to an AVC. Such clients are likely to jump at the opportunity to mastermind their own investment strategies - and escape from the high charging structures of some occupational arrangements.

 

Property still an option

 

Although the rules on residential property were changed,  there are still a number of way in which your clients can invest in property through SIPPs.

 

Partnerships and company directors can now buy their premises. Direct investment is restricted to commercial property, but clients can invest in residential property through a number of pooled investment vehicles.

 

Property funds have become very popular - and they have been targeting SIPP investors. The funds have been established in a number of formats, including unit trusts, investment companies with variable capital (ICVCs) and limited partnerships. You'll soon be able to add Reits (real estate investment trusts) to the list of options that you can recommend.

 

Keeping it simple

 

In one respect, pensions simplification is living up to its name.  In today's highly flexible and mobile world, your clients are likely to have myriad pension entitlements, including frozen pensions, paid-up benefits and buy-outs bonds.

 

You can now sweep up all of these past service benefits into your client's SIPP by putting them into a Wrap. This simplifies record keeping and makes it easier to ensure that the overall fund doesn't exceed the lifetime allowance. It also boosts the funds in the SIPP and enables your client to invest them wherever they wish.

 

Avoding high charges

 

Potential SIPP investors often resent any requirement to hand over the accumulated value of their SIPP to an insurance company, in order to buy an annuity.

 

They should be receptive to the idea of unsecured income (the new name for income drawdown) until age 75 - plus the option to draw an alternatively secured pension (ASP) instead of buying an annuity. This will work in a similar way to income drawdown - with the maximum income being restricted to 70% of the amount that could otherwise have been provided by a conventional annuity.

 

There are an estimated 20,000 individuals with pension pots in excess of the lifetime allowance of £1.5 million. For them, the 55% tax penalty on over funded pension plans is likely to make SIPPs and other pension arrangements unattractive.

 

In this case, you should probably consider offshore investments, which can roll-up tax free until they are sold, when the capital gain will be taxable at 40%. While this tax charge is hardly a major benefit, it is more attractive than the 55% alternative under a pension plan. In the meantime, any income taken will also be taxed at 40%, although there may be some tax deferral benefits.

 

There are excellent sales opportunities in the burgeoning SIPP market. IFAs can take advantage by using their expertise and that of some of the providers.