For most people their pension fund is likely to be their most significant capital asset after their house.
Yet most investors have very little or no idea how their pension fund is invested, or indeed how it’s performing. In some cases, trustees and members only really discover this when they come close to retirement and suddenly wonder just how they are going to move from the accumulation to the income-paying phase.
As pensions are such an important part of any individual’s assets, it’s curious that nearly everyone who has invested in an insurance-based product only receives an annual summary of performance and a general letter from the insurance company commenting on the market.
Secondly at that time, whether positive or negative in market terms, investors are offered the opportunity to switch to one of the many other funds the insurance company runs. However, this comes with no recommendations as to what action they should take.
As a result of this most people opt for the simplest solution, which more often than not is to stay in their current managed fund with the hope that this strategy works out in the long term. Others who had made a bold decision a few years before, will probably remain with that decision despite changing markets.
A classic example would be the many people who invested in Japan and the Far East in the late 70s and early 80s and did very well. Had they done so more recently, however, they would have done extremely poorly.
The other problem with insurance-based products is that no one has any real idea of exactly where their money is invested, other than in a particular fund. Most individuals have never met with their fund manager and almost certainly do not have the option of staying in cash. In other words, flexibility is almost non-existent and yet individuals are entrusting one of their major assets to a firm they know very little about, apart from their perception of the brand name. It’s often very difficult to gauge transparency and accountability in these funds.
I believe that self-invested personal pensions, or SIPPs, are a very good alternative and are an extremely effective way of overcoming the problems mentioned above. They allow you to take control of your pension fund so that you are able to choose your fund manager, who will then either manage it on a discretionary or advisory basis, or assume an execution only role for sophisticated trustees as long as the government’s pension rules are strictly followed.
In order to transfer pensions to a SIPP there’s a number of steps you must take. Firstly, individuals will almost always need an independent financial advisor, who will negotiate with the insurance company for the money in the fund to be transferred to the SIPP, and who will then ensure the transfer process flows smoothly.
Next, a pension administrator will need to be appointed. Normally your IFA will be able to recommend someone. Lastly, trustees need to find someone to manage the portfolio. The management can be done on a discretionary or advisory basis and trustees should ensure they meet the person who is actually going to manage the portfolio, or help to manage it on a face-to-face basis.
One of the major advantages of a SIPP is that members and trustees can then talk with the fund manager and they can adjust the SIPP to take into account changes in circumstances and the market place.
It should be emphasised that a SIPP has the same benefits associated with any personal pension with an insurance company – that is shares quoted on a recognised exchange, fixed interest and stocks – including gilts and bonds, unit trusts and options.
And perhaps more importantly, cash and commercial property can be invested in. When one reaches retirement, the pension can be used to purchase an annuity, withdraw the normal tax free cash or provide income for drawdown or phased retirement.
For accountants there’s an added benefit of recommending a SIPP. They can earn a percentage of any management fee that would normally be associated with SIPP management, and add value to their client base.
- Jeremy Harris St John is director of private clients for the Eden Group.