Off the shelf or made to measure?

SIPPs - self-invested personal pension schemes - have been around since 1989 but are now losing their elitist tag and gaining popularity, says John Moret

These days talk of personal pensions invariably leads quickly to discussion of misselling and compensation issues. The heady days of the late Eighties when personal pensions were the fastest selling financial services products have long gone. Credibility and confidence have largely disappeared.

There are exceptions - in particular the investment trust sector has quietly and unspectacularly broken into this market with the launch of some simple low-cost products. Their entry has been facilitated through what in the trade is known as "unbundling", under which the servicing and administration of the products has been subcontracted to a specialist supplier, leaving the investment trust companies to concentrate on their strengths - promoting the underlying investment vehicles.

This approach has evolved as a result of the development of a special type of personal pension - the self-invested personal pension or SIPP for short. SIPPs came about as a result of Nigel Lawson's 1989 Budget when he gave everyone in a personal pension scheme the right to manage their own investments.

The first SIPP product was launched in 1990 and there are now 18 providers of SIPPs - not only insurance companies but also stockbrokers, fund managers and other financial institutions. A new association, the SIPP Provider Group, was formed in January to encourage the development of SIPPs and to strengthen formal dialogue between providers and government.

Unlike traditional personal pensions, SIPPS do not have to be invested in funds managed by one pension provider. SIPPs give much greater investment flexibility subject to only a few Inland Revenue restrictions. You can invest in shares, bonds, unit and investment trusts, insurance company funds, deposit accounts and commercial property. Other more diverse investments such as milk quotas and secondhand endowment policies may be allowable in certain circumstances.

You can run your own SIPP investment portfolio yourself although this is only for the experts. Most investors will use the services of an investment specialist. Often your financial adviser - including some accountants and solicitors - will be able to fulfil this function, but in other cases the services of a stockbroker or similar organisation may be required.

Many insurance companies run SIPPs that require some investments to be held in the insurance company's own funds. You may view this as an unnecessary restriction and turn to other providers that offer a greater investment choice. At least one provider offers a menu-type approach with three tiers of investment choice - one limited to its own funds - a second providing access to collective investments such as unit trusts, investment trusts and insurance company managed funds - and the third providing access to all permitted investments. The charges made reflect the degree of investment choice allowed.

Importantly at a time when many investors are concerned at the costs associated with traditional personal pension plans, SIPPs can offer significant savings as they usually operate on a fixed fee-based structure. Despite their elitist tag, SIPPs are not only for the rich but are worth considering by anyone looking to save seriously for retirement. Certainly a SIPP can compare favourably with typical insurance company plans - if you are planning to contribute pounds 250 per month or more or a single contribution of at least pounds 5,000.

SIPPs benefit from the same tax-breaks and incentives as other types of pension with the usual personal pension contribution limits. Consistently they appeal to individual investors - self-employed and employees alike who don't trust insurance companies or who want personal attention and involvement in the running of their own pension fund.

Those with existing private investment portfolios are also likely to be attracted to SIPPs. A number of professional partnerships, along with small businessmen with substantial transfer values from previous pensionable employment, have used SIPPs to finance the purchase of new commercial premises.

The Inland Revenue discriminates against SIPPs by not allowing existing commercial premises to be held as SIPP investments. The SIPP Provider Group is lobbying for a change in the regulations to allow sole proprietors and partnerships to use their SIPP to buy their existing commercial premises. This would provide many smaller businesses with a real boost. Interestingly the recent Retirement Income Inquiry recommended in its report that the self-employed should be allowed to invest part of the new proposed compulsory pension contributions in their business.

SIPPs have received a major boost with the recent introduction of income withdrawal for personal pension schemes. This allows individuals to draw income within prescribed limits from their personal pension without having to convert the fund to an annuity - particularly useful when interest rates are low.

What many investors fail to realise is that the regulations that apply to income withdrawal do not allow the personal pension provider responsible for managing the investments to be changed once income payments have started. Given that income payments could continue for 15 or 20 years this is a serious restriction. SIPPs overcome this problem by allowing the flexibility to switch to another fund manager at any point. Consequently if you are thinking about using income withdrawal you should strongly consider using a SIPP.

There are probably still fewer than 7,500 plans nationwide. However their popularity seems certain to increase as awareness of the investment attractions and cost-effectiveness grows. By 2000 the Provider Group expects SIPPs to be one of the principal vehicles for individuals' pension savings, particularly for the self-employed, partnerships and the increasing number of "mobile" professional employees.

The author is head of sales and marketing for Winterthur Life's Professional Advisers Division and is also chairman of the SIPP Provider Group.