UK: From Stakeholders To SIPPs Your Pension Options Explained

Although the rules governing how much individuals can contribute to, and accumulate within, UK-based pensions were harmonised on 6 April 2006, vast differences in investment flexibility and charging structures remain.

In this article, we investigate the key differences between the three individual pension contracts available: stakeholder, personal and self-invested.

The primary difference between a stakeholder and a personal pension is that the former must, by law, meet certain standards in respect of, amongst other things, access and charges. These standards aim to make stakeholder pensions accessible to those with low or zero earnings, and to make charges more transparent.

Stakeholder pensions must accept contributions from £20, which members can cease at any point without penalty. There are no upfront charges or transfer or early retirement penalties. The annual management charge (AMC) is capped at 1.5% for the first ten years and 1.0% thereafter, and is the only permitted charge. The AMC must cover all administration and investment management costs, as well as adviser remuneration.

Although a stakeholder pension is generally the cheapest option for those without access to an employer-subsidised scheme, the restriction on charges means that such contracts are also the least flexible in terms of investment options offered.

Stakeholder pension providers are required to offer a ‘lifestyling’ fund, which automatically switches investors out of equities and into fixed-interest securities and cash, as a default investment option when they near retirement. Some contracts, notably those available from banks and building societies, offer no other alternative.

Some pension providers give access to a handful of alternative funds, which are usually managed in-house; some also provide limited access to externally managed and tracker funds. But most managers do not provide a particularly wide range of funds, which is understandable given such a restrictive charging structure.

We believe that this lack of investment flexibility means that, in spite of low charges, stakeholder pensions are generally only suitable for smaller contributions or those with little desire to invest outside the norm.

Personal pension plans (PPPs) were the original individual personal pensions and replaced retirement annuities on 1 July 1998. PPPs have similar legal structures to stakeholder plans, however, they are not restricted by the same charging regime and can offer a much wider range of funds.

Modern PPPs offer between 50 and 100 funds covering most asset classes, sectors and geographical regions. Although some are managed internally, many are provided by external investment houses. This enables investors to move between funds and fund management groups as their circumstances and market conditions change.

Some funds will charge an AMC of more than 1.5%, although a reduction in this charge is often offered by way of ‘large fund rebates’. Investors will have to consider whether the availability of a wider range of funds, together with access to a number of fund management groups, justifies a possible increase in costs.

Self-invested personal pensions (SIPPs) are a form of PPP which give individuals far greater control over their investments. As a result, their popularity has grown since the pension contribution rules were relaxed on 6 April 2006.

SIPPs are currently available from SIPP providers approved by the Financial Services Authority, and come in two basic forms: the ‘hybrid’ and ‘pure’ SIPP.

Hybrid (or deferred) SIPPs are generally offered by insurance companies and require investors to place a proportion of their funds into the provider’s funds. There are variations to this theme, notably, where providers offer SIPPs better terms for their funds than they do for other investments.

Pure SIPPs allow access to most investments, notably, equities, futures and options, fixed-interest securities, cash deposits and commercial property. SIPP regulations prohibit certain investments, in particular, residential property and tangible moveable property, by imposing significant tax penalties.

SIPP members can either manage their funds personally or employ a professional fund manager to do so on a discretionary or advisory basis. SIPPs enable investment that is bespoke to the investor’s circumstances, attitude to investment risk and retirement plans.

SIPP wrappers will have an initial establishment charge, an annual fee and transaction fees which vary with the investment type. An investment manager will levy annual charges and investors will also have to pay for advice and administration.

While SIPP charges are undoubtedly prohibitive for smaller contributions and funds, the investment flexibility they offer could benefit investors with larger contributions or funds compared to the stakeholder and personal pension models. As ever, obtaining expert advice is imperative.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.