Sipps are not a total panacea

Published on Friday 12 December 2008 18:33

INVESTORS considering moving their pension scheme have been urged to tread carefully after evidence of misselling was uncovered. The Financial Services Authority said last week that unsuitable advice was being given in 16 per cent of all pension transfer cases, with investors moved into personal or self invested personal pensions (Sipps) that were unsuitable for them.

In 80 per cent of cases where some misselling was found, investors were moved into a more expensive pension without justification. Many of these switches were into Sipps, which offer greater investment flexibility but at higher costs, to unsuitable clients.

The popularity of Sipps soared after the rules limiting the amount that could be invested in pensions were relaxed in April 2006 when a new pensions regime was introduced. "They are now regulated but previously they were very niche and bespoke arrangements," said Bob Hair, financial planning director at Turcan Connell in Edinburgh.

But with commission of up to 7 per cent on offer to advisers for pension transfers, there are fears that misselling is widespread. It's estimated that around half a million investors have taken out a Sipp, with a typical investment of between 50,000 and 150,000.

Malcolm Cuthbert, managing director of financial planning at Killik & Co, believes that, in many cases, advisers are moving people out of their pension schemes and into Sipps, only to invest their money in the same assets and funds as before. "Sipps offer more risk for more reward but 90 per cent of people should not be in them. Millions of people in the UK do not want to take investment risks so they should stay with their occupational or stakeholder scheme."

Cuthbert said he had received queries from clients asking to be moved into Sipps, only to find that all their needs could be met in a traditional personal pension plan. "If a personal pension plan offers enough for you, why transfer? It's about choice and flexibility."

Hair agreed. "There have to be valid reasons for any pension transfer and it must sit with your long-term planning. In many cases it can be suitable and give you important flexibility, but it's a case-by-case choice."

What Sipps do offer over personal pension plans is a wider array of investment options. Although many traditional plans now offer a wide range of fund choices, Sipps can also hold venture capital trusts, investment trusts, shares, exchange traded funds and commercial property, among other assets.

If you want this choice, flexibility and more control over your pension investments, Sipps could offer significant benefits. "Sipps can stay with you throughout life, so you can control everything in it, including old occupational schemes, and you can do more financial planning," said Cuthbert. "Control is a real driver for Sipps but most people don't want that."

Whether a Sipp is suitable for you is not about the money you have to invest, but your risk appetite and objectives. For example, someone in their twenties who can expect to earn an above average wage for the duration of their career could find a low-cost Sipp makes sense. Alternatively, someone close to retirement with a six-figure pension fund may choose to keep their money in core low-risk assets, meaning the range of choice in Sipps is not necessary.

If you're in a final-salary plan, transferring out is rarely recommended. Many schemes offer guaranteed annuity rates that are not available elsewhere, while they may offer tax benefits that would be lost by switching.

The most important thing for investors considering a transfer t is to get qualified independent advice. "Suitability is a value judgment so take advice and make sure it from a suitably qualified, fee-based financial adviser," said Hair. "If you go to a fee-based adviser you know that the advice is based on what you need."