Independent Financial Advisors for IT Contractors
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Henry Ford famously explained that customers buying his early cars could pick any colour they wished...so long as it was black. Unfortunately much the same choice has historically been on offer from pension providers with investors limited to a narrow range of, often under-performing, investment funds administered by the insurances companies own in-house managers.
In recent years an increasingly sophisticated investing public has developed an appetite for greater control of the decision making process and has demanded increased choice with regard to how and where their hard earned cash is invested. Savers are now routinely picking their own ISA funds and the tech stock boom of the late 90s, whilst ultimately ending in tears for many private investors, finally hammered the last nail in the coffin of the traditional stockbroker as online share dealing came of age and dealing costs plummeted.
The demand for a more hands-on approach to investments has inevitably spilled over into the realm of retirement planning and ever more savers are keen to make their own decisions with regard to how their pension monies are managed.
Whilst the general investor has been unaware of the alternatives or happy to accept the limited choice on offer from the insurance companies, there have been a small band of fearless self-investors who have made use of specialist pension vehicles to administer their own retirement funds.
Two investment 'wrappers' have acted as conduits for these pension savers. For general employees and the self employed, then chancellor Nigel Lawson (remember him?) first introduced the concept of a Self Invested Personal Pension (SIPP) with contributions based on age related allowances. Its corporate alternative, used by company directors and managers is the Small Self Administered Scheme (SSAS), which works under the same age, salary and length of service rules as the more widely known Executive Pension Plan (EPP).
SIPPs and SSASs allow an enormous range of investment options to be exploited for those with the desire, time and confidence to individually manage their assets. Alternatively a professional adviser can help with some basic ground rules and guidance allowing the investor to dabble when they have the inclination to do so. Either way the investor can amass a bewildering portfolio of assets tailored to their exact requirements. Individual shares both here and abroad, unit and investment trusts, government stocks and bonds can all be held within these wrappers.
Of particular interest to entrepreneurs and general investors alike has been the ability to hold property within a SIPP/SSAS. Commercial property has always been a staple of the self-investor due to the relative lack of investment volatility, capital growth prospects and income stream thanks to upward only rent reviews.
Business owners have enjoyed the added bonus of being able to hold their own company premises in a tax efficient environment within the pension fund. The investors nest egg is further enhanced as a result of accumulating rental payments made from the corporate bank account. It has long been considered a far more tax efficient method of maintaining a secure long-term base for the business than simply paying out rent to a landlord and there is also the prospect that the property could ultimately provide the company owner with an ongoing income into retirement once his company is sold.
Aware of the huge pension funding gap that the country faces and the very real prospect of hardship in retirement for millions of Britons the government introduced the pensions simplification legislation to encourage greater investment. Massive interest was generated throughout 2005 as the new rules looked set to sanction far higher levels of investment overall but also to allow residential property to be held in a pension for the first time.
Buy to lets, holiday homes and overseas property were all mooted as potential assets that could be rolled into a self invested scheme as an 'in specie' contribution but at the 11th hour the Treasury, fearing a potential deluge of transferable assets about to become eligible for tax relief, backtracked. They declared that 'in specie' transfers could still occur but that residential property and other esoteric investments such as antiques and fine wines would be subject to punitive tax charges and as a result the initial euphoria past. Commercial properties such as shops, office and industrial premises can still be used as a viable self invested asset however and it appears that hotels and certain other similar properties may be also allowable.
Pension holders have the ability to 'gear' their property investment by way of commercial mortgages with up to maximum of 50% of the total value of the fund and in this way can purchase a bigger asset than the core pension fund would otherwise allow.
Whilst a direct bricks and mortar investment into residential property is not possible, there has also been a great deal of excitement in pension circles surrounding the ability to contribute to pooled investments that do. These investment vehicles are in their infancy but are expected to represent a further potential diversification for self-investors.
Traditionally these niche pensions were relatively costly to gain access to. Initial set up costs were high and dealing costs prohibitive, but the past 18 months has seen SIPPs in particular move into the mainstream of pension products. Admin fees have fallen and service offerings enhanced as the product providers eyed a huge potential market with regard to residential property. Whilst holding buy to lets etc in a pension proved a false dawn, the wrappers within which the new investments were to be held are still available and canny investors can access massive investment flexibility at a fraction of the costs that used to be charged.
Thanks to changes in the so called 'concurrency rules' after pensions simplification, existing members of a company pension scheme will, for the first time, be able to also fund a SIPP and so a far wider investing public will have access to self investment for funds that they wish to set aside independently from their employers pension.
Along with the extra choice that is open to a self-investor comes an added danger that the wrong investment decisions may seriously impact on your retirement prospects. A disciplined, measured approach to the investment is invariably the best course but it is important to realise that a SIPP or SSAS will need constant monitoring and attention to maximise returns as opportunities arise.
Whilst there have been massive improvements in recent years, a typical SIPP will still feature charges that are higher than those associated with the new breed of mainstream pension schemes. Many of these stakeholder style plans benefit from no initial set up costs whatsoever and only levy a very low annual management charge. In addition, many traditional pension providers have been forced to greatly increase the access that they give to specialist outside managers and so a good degree of investment freedom can now be accessed from these more mainstream pension products.
Against this changed background, as IFAs our advice has been that there is no point paying the extra admin fees associated with a SIPP/SSAS unless you are certain that you are ready to fully exploit the investment freedom that they represent.
Under pension simplification the strict boundaries between different pension vehicles are virtually disappearing and our advice has been that a low cost stakeholder for instance is, in effect, a deferred SIPP. There are no exit penalties to transfer stakeholder funds out to a SIPP at a later stage when required and this way investors benefit from the lower running costs now, but ultimately lose none of the longer term flexibility.
If you ultimately decide to self invest an important consideration must be to always ensure that your pension is spread across a varied range of investment classes to ensure good long term investment prospects. In this way, irrespective of whether equities, bonds, government backed gilts or property, the UK or overseas markets are the best performing asset type you stand to be in the right place to exploit opportunities. This approach has been proven to be the key to long-term investment success but far too often we find clients with 100% of their fund in one asset class.
When an investor is ready to self-invest they need to be mindful of the fact that this is an area that largely falls outside of Financial Services Authority (FSA) regulation and it is best to stick to a mainstream provider with a good track record of administering this type of plan.
Charges are an important factor as there will be no point in having increased investment performance as a result of your endeavours only to find that dealing costs and admin fees mean that net returns would have been better using a low cost traditional pension vehicle.
It is crucial that your provider accommodates the particular areas that you are likely to want access to (i.e. some schemes do not allow property investment). Ideally the scheme will also be with a company who has shown and continues to show long-term commitment to the pensions market because changes in legislation and increased options in retirement demand an ongoing investment in new products and systems that a minor player could be unwilling to support.
As we enter this brave new world of investment choice Freelancers now have the tools at their disposal to exercise real control over their futures. It may be that time constraints mean that full self investment is not appropriate at the current time in which case it is nonetheless vitally important to keep a watchful eye on the asset spread and performance of any existing and ongoing in-house investments held within traditional pension wrappers to ensure that your money has the optimum chance to grow.
For those who do wish to embrace self investment, it is possible to experience a very great sense that you are in control of your own destiny, through the good times and bad, towards the ultimate goal of a prosperous retirement.
For further information, and to discuss your personal circumstances please complete our Pension Finder.
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