Sipps received a massive boost to their popularity post A-Day as investors responded to the tax advantages and the greater degree of control they offered through self-investment.
But as the regulator and legislators have turned their attention to pensions and Sipp arrangements, changing the rules on a regular basis, do these investment wrappers hold the same sway with Financial Planners in 2012 as they did in 2006?
Adrian Pickersgill CFPCM, director of Chatfield Private Client Limited, which has offices in Birmingham and London, believes Sipps have had a good run since A-Day because they offer the opportunity for self investment and so more control over a pension. He said: “But unless clients take full advantage of it they are often better off buying an open architecture personal pension. Nowadays we only use Sipps where they are needed because the client wants to add property, land or something that is completely off-plan.”
Land purchase formed part of the reason Mr Pickersgill recently set up a Sipp for a farmer. The farmer wanted to buy some grazing land to use for his farm and had two existing personal pensions. He had been referred by another of Chatfield’s clients for whom the firm had set up a Sipp in the past.
Mr Pickersgill explained: “The farmer’s pensions had been set up when he was an employee and he had written them off as something he would never have done if they hadn’t been compulsory and he viewed them as having little value for him. So, instead of approaching his bank for lending, we consolidated the two pensions into a Sipp and used the money to buy the land he wanted. He now pays rent for the land which goes back into his Sipp.
“He knows the land very well, so he understands it as an investment medium and it can stay in his Sipp for as long as it is needed.”
The farmer’s original attitude to pensions is one that Mr Pickersgill is experiencing increasingly with clients, he said. “When we talk to them, more clients than not have written off their pensions and have no faith in them. They are working on alternative strategies such as property to get their income in retirement.”
What is causing clients concern around pensions is the “constant meddling”, said Mr Pickersgill. “The clients’ attitude is understandable - we talk to them at review every year and the rules have changed yet again. People don’t know where they stand from one year to the next, they feel they have no control over their retirement plans and so they lose faith.”
However, where clients are looking to be creative with their pension arrangements, Sipps can be of value, he said. “For example where a group of clients pool their pensions to fund a new business - when they do that they can consider all sorts of investments.”
In another case the firm worked on, three clients in the same firm wanted to do an in specie contribution of a property into a pension, with carry forward over three years. “The business partners wanted to buy the property they work in and work that into their pensions in some way.
“We looked also at SSAS but the client preferred to go down the Sipp route. They made an in specie contribution to their respective Sipps and saved an awful lot of corporation tax because the payment went into the Sipp as an employer contribution.
“And because the property they are buying is used for their business premises, they will also be paying the rent into their pensions. This is a useful means to increase the value in the pension because the rent does not count as a personal contribution which means they can pay in at a lot higher rate than the current pension limits allow,” he added.
Andrew Hall, director and Financial Planner with Sound Financial Planning and Paul Spires CFPCM, founder and chairman of the Essex branch of the IFP, have found business owners are among the clients most keen to examine Sipps as part of their retirement strategy.
Mr Hall said: “Most business owners will have heard about Sipps and some of the benefits – primarily that they can save tax but we have to ensure the tax tail doesn’t wag the dog.”
Many business owners want to look at putting their commercial property into a Sipp, he said. “Owning a property via a Sipp can be most beneficial because of the tax relief on the asset, which effectively means they are getting the property at a discount price as the taxman is contributing relief at their personal tax rate.”
He added that what business owners also like is that there is an element of protection involved, so if further down the line the business runs into trouble the property can be ring-fenced from other business assets.
However, Mr Hall pointed out, liquidity of the asset is one of the major disadvantages when making retirement plan arrangements in this way. “Once a property becomes part of the pension scheme it comes under pension scheme rules. Obviously, the property will require regular maintenance and any rental arrangement will need to be formalised with an independent valuation and formal lease agreement. This adds overall cost which needs to be addressed in any Financial Planning undertaken,” he said. “But often it will remain in the client’s interests to have their business property in their Sipp rather than purchase it in another way.”
Mr Hall outlined a recent case of a business- owner client with a building worth around £1m, more than half of which was funded by mortgage debt. “He was referred from his accountant who had been telling him to look at including the property in a Sipp. Once we went through the exercise he was able to reduce the mortgage debt by a third and have no personal borrowing. Also, at the moment the company is paying rent of around £75k a year, which is taxable. Now the rent will go to the pension scheme, which will help build the scheme but is not treated as a contribution so does not fall within the client’s personal pension limit of £50k a year.”
Charging is the area that Mr Hall flags when using Sipps. “You have to understand the charges and costs for the client in setting up a Sipp,” he said. “Where a client is transferring money in from another pension there can be more charges involved than a client realises so it’s important to ensure they are aware of all the costs.”
“We had the money in our pensions so it was sensible to buy the property and then rent it to back to the business,” he said.Peter Cooper CFPCM, is a director with Cooper Johnstone Associates in Harrogate. The partners of the firm have recently purchased the property in which their business sits and placed that in their Sipps.
Mr Cooper said in his experience most clients coming through the door looking to save for retirement have not heard of a Sipp. “We would steer them in that direction only if they had more then £100,000 to invest because with less than that we feel a Sipp is not cost effective, and only where they could benefit from a managed portfolio.
“Then we might used fixed term accounts, especially if a client is nearing retirement and wants to keep the money as secure as possible, and we might use some structured deposits, direct gilt holdings and other regulated investments that are not available in a standard personal pension from an insurance company.”
Bloomsbury Financial Planning’s Robert Lockie CFPCM FIFP, said that the firm primarily uses a passive investment strategy, low cost Sipps along with a custodian and manages the portfolio within that framework.
“By and large we don’t use full-blown Sipps. We have a handful of clients with property in their Sipps, mainly because they have come to us with that arrangement already. We don’t favour putting large illiquid assets in the Sipp and, of course, property has annual maintenance and upkeep costs to take into consideration.”
An exception the firm made, he said, was for a client who had a piece of land on which he was seeking planning permission. “We put the land in a full-blown Sipp wrapper and when the planning permission was granted that increased the value of the fund and saved him tax. But it formed part of his portfolio.”
The passive investments the firm uses are low cost, institutional funds, “so not ones that can be bought through any other wrapper than a Sipp,” Mr Lockie said. “We couldn’t buy any of these funds in a fund supermarket-style pension.
“Taking the low cost route - and most of our clients pay £45 a quarter - means clients can invest in a Sipp with a portfolio of £30,000 or more,” said Mr Lockie.
Ray Prince CFPCM with Rutherford Wilkinson in Newcastle has had few cases that require a full- blown Sipp cross his desk in the past year. “One of the benefits of Sipps is the ability to self-invest but most of our clients are time poor and that is not the route they want to go down,” he said.
Where Mr Prince does use Sipps is, for example, with clients who are dentists who want to put their dental surgery in their pension although he exercises caution. “My concern in doing this is that it imposes pensions restrictions on the asset and, come retirement, it’s not a matter of selling the building and getting a cheque for the proceeds. You have to weigh up the tax benefits with potential disadvantages later on in the long- term financial plan.”
Flora Maudsley-Barton CFPCM, proprietor of Parsonage, based in Altrincham, Cheshire, said she rarely uses Sipps, finding personal pensions will fit most people’s needs. The biggest challenge in many ways is to get clients to consider a pension, she added. “Some clients strongly dislike the word pension policy because they have developed such a poor reputation. I will often have to demonstrate why a pensions policy will benefit them.”
Where she does use Sipps is to facilitate drawdown in the decumulation stage of a pension, she said. “When a pension is in decumulation it is important to purchase a range of income producing assets and with many packaged insurance pensions that is less easy to do.
“But for the most part I never assume a client will be best placed in a Sipp. I have to know they will use the parts of the wrapper that they can’t get elsewhere before I will take them down that route,” she said.
Justin King CFPCM and a registered life planner, is managing director of MFP Wealth Management based in Devon. He agreed with Ms Maudsley- Barton and said he rarely uses Sipps these days as the open architecture now available in personal pensions combined with a wrap can satisfy most clients’ pension planning needs.
"I get few people wanting to put property in their pension these days. The biggest challenge is getting people to engage with the need for a pension per se. With the rules changing from one year to the next clients are becoming frustrated with them. It is a difficult time for pensions with all the tinkering that is going on. We need a period of stability so clients and planners know where they stand."