SIPP Panel (January 2008) - Busy, busy

The panel
Chairman: Stuart Bayliss, director, Annuity Direct
Bayliss is a director of Annuity Direct and other adviser services. Annuity Direct has been a major advocate of improvements in the open market option process, assisting in developing new products and e‑solutions for the whole market. Through his consultancy, The City Partnership, activities have included managing the development of Leeds (Halifax) Life and repackaging M&S Financial Services.

Martin Tilley, pension consultant and business development manager, Dentons Pension Management
Having worked within the SSAS departments of Sun Alliance & Crown Financial Management for six years, Tilley joined Dentons in 1988. He qualified as an associate of the Pensions Management Institute in 1994.

Jonathan Watts-Lay, director, JPMorgan INVEST
A founding director of JPMorgan INVEST, Watts-Lay began his career at Nationwide Building Society and then spent over five years working for SHL Group plc. Prior to joining JPMorgan INVEST he was head of UK marketing at JPMorgan Asset Management.

John Moret, director of sales and marketing, Suffolk Life
Moret is often referred to as “Mr SIPP”, having spent much of his working life promoting the advantages of SIPPs. He was the inaugural chairman of the SIPP Provider Group (now Association of Member-Directed Pension Schemes) and has worked closely with government and regulators on a range of issues, including the introduction of income drawdown and the regulatory framework for SIPPs.

Tom McPhail, head of pensions research, Hargreaves Lansdown
McPhail has worked in financial services since 1986. He spent a total of 12 years working for insurance companies in sales and marketing, including four years working for a specialist SIPP and drawdown provider in the mid-1990s. In 1998 he rejoined IFA firm Torquil Clark where he set up and ran their direct to customer retail pensions operations. In 2002 he was recruited by Hargreaves Lansdown as their head of pensions research and company spokesman on pensions issues.


Bayliss: With larger numbers using SIPPs for their pension savings, do SIPP providers need to review the information and service offered to their customers when they start to crystallise benefits?

Tilly: I believe with FSA regulation and the need to provide illustrations and cancellation periods, providers are fulfilling their responsibilities to the market. It should be remembered the SIPP provider can only provide so much factual information about its own product without giving advice. The latter is the remit of the client’s financial adviser, or if they have chosen to go direct to the SIPP provider, the client themselves. The majority of SIPP providers do not offer annuity products, but I believe it is reasonable to make mention of alternative considerations and to point them in the direction of financial advisers for further information.

Watts-Lay: The fact there are greater numbers of people investing in SIPPs than ever before should not influence the information and service SIPP providers offer. It has always been incumbent upon pension providers to offer appropriate, timely and accurate information throughout the “accumulation phase” of the pension and then at the point of crystallisation, and that should continue to be the case. The only difference may be to address the capacity issue where SIPPs are being administered by relatively small departments which, as a natural consequence of greater supply and demand, may need to grow in advance of crystallisation.

Moret: The options at retirement are an increasingly important part of any SIPP proposition. Clearly individual providers will decide which options they are prepared to accommodate. Certainly at the bespoke and top end of the SIPP market, where funds typically will run into several hundred thousand pounds, flexibility is likely to be a requirement. Obviously where unsecured income and ASP are used providers will need to be equipped to provide regular reviews with up to date valuations.

McPhail: There is a more generalised need to improve the service the pension industry offers to investors as they reach retirement. There is now a huge breadth of choice available to investors, from conventional level annuities, inflation linking, and impaired life pensions through to unit linked annuities, SIPP drawdown and phased retirement. As an industry I think we need to focus on communicating with investors more effectively to improve their decision making around this event. The good news is SIPP investors tend to be more switched on to their pensions than are most pension members, because the nature of SIPPs encourages hands-on management.


Bayliss: With “at retirement” choices both broadening and becoming more complex, what should advisers provide by way of explanation as to the choice available to clients as they commence to crystallise and then crystallise further? What risks needs to be reviewed and how often?

Tilly: The “at retirement” market is widening and initial decisions and regular reviews are a must. This will become a specialist area of advice, but it must be remembered we are also talking about a relatively small proportion of the overall market where anything other than a conventional annuity might be relevant.

Watts-Lay: At the point of “retirement” there needs to be an understanding of the two broad alternatives, annuity and USP.
“Annuity” is the most stable form of income provision, but this stability comes at a price. One disadvantage is the (perhaps remote, but nevertheless real) risk of the annuity provider “going bust” and so there is a risk that the ongoing income could be lost.
The main price to be paid is the irreversible nature of the decision. Once an annuity has been purchased there is no ability for the annuitant to make alterations either according to the future economic climate or to personal circumstances.
The flexible nature of the USP route therefore needs to be explained but the downside also has to be made abundantly clear – the potential market risks inherent in the fund.

Moret: It is difficult to generalise but the principles of attitude to risk – both investment risk and mortality risk are not new. Income drawdown was introduced 13 years ago and most advisers should be familiar with the techniques involved and the need for reviews.
Some of the newer annuity products have introduced more choice and clearly advisers need to know how these products work.

McPhail: Investors need to be encouraged to consider all the various post-retirement risks, and how they can be off-set. Unless the investor uses their entire fund to buy a life inflation-linked annuity (possibly on a joint life basis), then there will be a need for ongoing support, but the level of support and input will depend on the actual arrangements. I suggest a review once or twice a year.


Bayliss: Post-75, ASP SIPP has become complicated with some providers questioning how any death benefits may be paid. With the arrival of investment‑linked annuities post‑75 able to offer significantly larger income/drawdown (up to 120pc of the annuity for their age), is there a future for SIPP post‑75?

Tilly: There will always be a place for SIPPs post-75 because, while the market will always generate new and innovative products, no product yet available offers a distinct advantage in every area over ASP. Thus, for each client, certain factors will be more important than others and for them, the product offering those factors will be the one of choice. It must also be remembered that a client can move from ASP to an annuity product, but cannot move back once there.

Watts-Lay: There is still a future for post-75 SIPP because the flexibility of income withdrawal levels leaves options open for the ASP holder. Despite the index-linked annuity still giving the chance of an income upside, it does not allow for income payments to be, where appropriate, reduced. Additionally the death benefits of ASP compared with annuity, be it either “traditional” or index linked, are considerable. The death benefit provision is an important consideration, especially for people approaching advanced ages.

Moret: The use of ASP has and is likely always to have limited appeal given the tax regime that now exists. Investment linked and third way annuities provide more choice although maximising income is not always the objective. The average lifespan of a SIPP currently is 15-20 years –the average age of our SIPP clients is in the early 50s. With increasing longevity it is only a matter of time before the current annuity compulsion rules are revised or removed.This will have a material impact on the lifespan of a SIPP.

McPhail: We are not currently comfortable with paying out any post-75 lump sum death benefits. There is certainly a strong argument for investment-linked annuities post 75, rather than a SIPP ASP solution. There will still be a solution for post-75 SIPPs, but I think we are in a period of adjustment at the moment.


Bayliss: 2007 has seen SIPPs popularised and the creation of hybrid products that blur the distinction between conventional personal pensions and the SIPP. Do you anticipate there will need to be a further review of the regulatory position in order to clarify the requirements for pure SIPPs as opposed to the “pretenders”?

Tilly: Whether or not this requires a regulatory review or not is debatable. What should be simply clear from the outset, and from a key features perspective, is what a product can do and more importantly what it cannot do, so as not to mislead and confuse.

Watts-Lay: Post-simplification all pensions are essentially treated in the same way. The only practical distinction from a regulatory perspective is the requirement for illustrations of investment returns and benefits to be provided pre-sale to purchasers of personal pensions, whereas the SIPP avoids this regulation. As more SIPPs are purchased which contain nothing more than unitised pension funds it seems reasonable that illustrations should be required for “pretender” SIPPs as they are for ordinary PPs.

Moret: The FSA has taken the view that SIPPs are a packaged product and are no different from other personal pensions. There is no indication its will change this view – their main concerns at present are around the suitability of the advice provided.

McPhail: Undoubtedly, the traditional high-charge SIPPs have been pushed out to the periphery by the new generation of low-cost SIPPs. Now SIPPs have been brought into the regulatory mainstream, there does not appear to be any pressing need for further regulation.