Would you pay a life assurance company £33,032 to look after a £100-a-month investment in a 25-year personal pension plan? Stop laughing, because that is what a recent survey of charges on personal pensions, carried out on behalf of Money Marketing magazine, found to be a far from exceptional case.
No wonder, then, that an increasing number of the 4.5 million self-employed and an unquantifiable number of directors of small to medium-sized companies are turning to Self Invested Personal Pension Plans (SIPPs) and Small Self Administered Schemes (SSASs). 'There's a real need for high net worth individuals to separate the tax advantages of pensions from the investments,' says pensions expert Marc Ainscough of independent consultants Fraser Smith. 'The big advantage of SIPPs and SSASs is control of both investments and charges. Anyone who is making pension contributions of more than £10,000 a year should consider a SIPP or a SSAS,' he says.
Michael Otway of stockbroker Carr Sheppards concurs. 'The appeal of SSASs for controlling directors is that it gives them the opportunity to create a reserve fund which can be used to finance the future growth of the business,' he says. 'They can buy property which can be used in the business or they can build up cash deposits which can be loaned back to the company at a later date.' Both SIPPs and SSASs also have the advantage of flexibility; if the fund managers don't perform you can simply give the investment management to someone else. Nor do you have to pay hefty penalties for the privilege.
SSASs are a variation on the occupational pension schemes operated by large companies and subject to similar legislation, which allows a generous ceiling on the amount which can be paid into the fund. Employees can contribute up to 15% of their earnings, but the company can pay considerably more, depending on the ages of the beneficiaries - provided that the benefits, when they come to be paid, do not exceed Inland Revenue limits (broadly, a pension of no more than two-thirds of final salary). They are commonly set up by controlling directors of small to medium-sized companies and often used as a place to 'park' profits in good years in order to be able to take a pensions holiday when times are tough. The major advantage of SSASs is that the company can invest in its own property through the pension fund and the fund can also make loanbacks to the company, albeit at a commercial rate of interest. Regulations restrict property investments to no more than 25% of the fund for the first two years and 50% thereafter.
James Minter, 47, who runs a south London construction business, has used a SSAS in a number of ways. 'The pension fund provided a mortgage for the company to buy premises and a building yard, and we eventually sold the property to the pension fund. We 98e also used it to buy out my former partner. It has been brilliant for a small business like ours. There are tremendous tax advantages as well.'
Most fully self-administered pension funds are provided by the large pension actuaries firms, which typically charge an initial fee of between £1,000 and £3,000. The ongoing charges may be a flat fee of anything between £500 a year to £1,200, or a percentage of the fund if managed.
There are also hybrid schemes where part of the investment is managed by a life company, which also carries out a range of basic services such as administration and actuarial reviews. The biggest operators in the field by number of schemes and value of funds are IPS Actuarial Services, which has nearly 1,700 schemes with investments valued at £850 million, and William Mercer, with 1,350 schemes worth £270 million.
SIPPs are used by the self-employed, sole traders, partnerships and high-earning executives who have opted out of occupational pension schemes and have more in common with the standard personal pension policies marketed by the life offices. They are not so flexible as SSASs and cannot be used to invest in property owned by the person who benefits from the scheme. 'There are tight controls on connected transactions and you can't make loanbacks,' explains Carr Sheppards' Otway.
Like SSASs, however, the individual can keep control of investments. David Mitchem, who has recently retired, prefers to manage his own investments within a SIPP. 'I intend to buy managed annuities when the new pensions legislation comes into force later this year,' he explains. 'I don't want to get into the position where I have to buy a relatively unattractive investment like a standard annuity when interest rates are low. After a lifetime working in the City I don't think you have to be speculative or expose yourself to undue risk, but I'm confident I shall be able to outperform any insurance company product.'
With SIPPs, limits are placed on the proportion of earnings which can be contributed to the fund - from 17.5% at age 35 or less, up to 40% at age 61 or over - but there is no limit on the amount paid out.
Most schemes are marketed through independent financial advisers, stockbrokers and pension consultants, many of whom are also actuaries or have an actuarial department within the firm. Firms like Pointon York and Personal Pension Management run 'branded' SIPPs which are sold by other advisers such as stockbrokers, IFAs and pension consultants. Typically there is an initial charge of around £500 and an annual management fee of around £300. Dealing charges for buying and selling securities will depend on who is running the fund. Stockbrokers tend to charge normal commission with perhaps a flat annual fee, while a life office may charge a percentage of the fund with a minimum of, say, £200 a year. For example, IFA Rathbones, charges an initial fee of £1,000, £400 a year for administration plus £200 a year if outside fund managers are used.
Ironically, for those who opt to manage their own investments the common trap is not excessive charges but apathy. 'A lot of SSAS money, for example, is just left on deposit,' observes Otway. 'Some people seem to forget about the scheme once they have set it up. After all, there's not much point having control of the investments if you don't actively manage the assets.'
The Growth of SSASs
1New statistics system introduced 2As at 24th February 1995.
Source: Inland Revenue.