Pension Planning

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By Sarah Modlock

It is not hard to understand the appeal of DIY retirement funds. In a world where an ageing population is set to feel the impact of more than a decade - so far - of abuse of pensions, why not take greater control of your retirement fund. Unfortuately it's not that simple.

Sales of Sipps - self-invested personal pensions - have soared in the last year, with as much as £3.5bn being invested in 2006. A Sipp is not actually a pension but a tax-efficient wrapper that can be used to shelter investments and can be maintained into retirement to deliver ongoing income.

The investment decisions are down to you and then your Sipp administrator follows your instructions, ensuring the investments are held securely and legally. Many household-name finance companies such as Fidelity, Legal & General and Standard Life have launched Sipps in the last two years. But most investors run their Sipps in consultation with an independent financial adviser.

From the 6th April, there will be the added attraction of full regulation by finance watchdog the Financial Services Authority. As a result, Sipps are getting even more attention. The worry now is that investors will not look before they leap. The 'obsession' that insurers and IFAs have with treating SIPPS as a product to be sold, rather than the all-embracing tax wrapper it is, will hurt the consumer, according to SG Wealth Management, the UK's first advisory service set up from outset as a wholly fee-based, advice-led service. The company believes that in its quest to find a more lucrative pension arrangement to sell and/or transfer existing client holdings to, the industry is already selling Sipps to people who don't need them, and under-delivering against the benefits they can provide to those who do.

DIY SOS?

The truth is that a Sipp is not a product at all, but rather a pension 'basket' - a wider container of a range of investment assets, from unit trust and OIEC funds, to individual stocks and shares through to holdings in commercial property - no different at all to a conventional well-balanced portfolio, but more tax-advantageous. Sipps are at risk of being mis-sold for two quite different reasons:

First, at one end of the scale, too many people for whom a straightforward, low-cost pension savings plan like a stakeholder pension would be more appropriate, are being sold or even transferred to a Sipp. For these people, the added flexibility - and charges - to shelter shares, commercial property holdings and other alternative assets are a waste of time, money and introduce unnecessary complexity. The driver for these sales is simply commission, as the product distributors compete for market share.

Second, at the other end of the scale, many Sipps are being sold to individuals who could and should take advantage of the ability to include more esoteric assets, but usually by advisers ill-equipped both in terms of expertise and the necessary systems to deliver the real advantages of a Sipp. In other words, the sale of a Sipp may be appropriate for the customer, but the adviser making the sale is not sufficiently qualified or able to deliver the benefits.

'Sipps are complete overkill for many people,' says SG Wealth Management's Neil Shillito. 'Too complex, too expensive - a sledgehammer to crack a nut. The industry wants to oversell Sipps because it creates a chance to grab previously-saved pension holdings by transferring them unnecessarily into a new Sipp product. The obvious question is: 'to who's benefit?'

'For the minority of people for whom a Sipp is appropriate, generally both the Sipp arrangement sold and the adviser selling it are ill-equipped to deliver the full benefits. Most IFAs in the UK have no formal investment qualification or experience and rely on 'out-sourcing', which is one of the reasons why 'fund-of-fund' arrangements are being sold like hotcakes, despite the extra charges involved.'

Neil Marsh of Sipp administrator Hornbuckle Mitchell says that the Sipp boom is making people more interested in pension investing and saving. 'If it takes the word Sipp to do this, that's fine, but investors must be sure of what they are buying into and understand the decisions they have taken,' he advises.

Legal limbo

Marsh is also concerned about the legal limbo investors could find themselves in when FSA regulation takes effect on 6th April. If a Sipp provider is not authorised then its customers will need to find a new provider that is. 'That means uncertainty, costs and delays,' he warns. So far, only a handful of providers have applied for regulatory approval. If your Sipp provider fails to get authorisation in time, not only will you not be eligible for redress from the Financial Ombudsman Service should something go wrong, but you could be prevented from making further contributions to your pension or even from buying and selling funds or stocks and shares.

Many small Sipp providers are expected to sell their business on to larger companies but investors are advised to check that they will not be left languishing in schemes run by unregulated providers. Pension experts recommend that you contact your Sipp provider as soon as possible to inquire whether it has applied for FSA approval. You can also check online at www.moneymadeclear.fsa.gov.uk. If your Sipp provider has not requested approval, ask whether an agreement to transfer your holdings to an alternative provider has been reached and if this is not the case then you will need to take action yourself.

What to watch out for...

Sipps are not right for everyone so make sure you do your homework and ask questions before signing up.
Research by personal finance bible Money Management magazine found that the information produced by Sipp providers is very often difficult to understand and this in turn makes it hard to compare features. 'Only 14 Sipp providers (out of 180) had ready literature intelligible enough to make estimates of charges,' the magazine says.

Make sure that any Sipp you choose suits your needs. There is no point in paying high charges for options you will never use. Also, as with any pension, you must be careful not to invest in anything that is more risky than you feel comfortable with.
Watch out for Sipps with restricted investment options - a new wave of Sipp-type pensions are appearing which can give you access to popular funds but not much else.