Blog: The changing face of self-investment

Phil Clarke, technical services manager at Rowanmoor Pensions, explores the "explosion" in SIPPs...

Some of you may remember Joint Office Memorandum 58, which clarified the rules for self-investment. It was very basic but also very radical.

The Finance Act 1973 made it possible for controlling directors to join occupational schemes and the small self-administered scheme (SSAS) was effectively created for this purpose.

The main governing document issued in the mid 1970s was Joint Office Memorandum 58, which allowed for investment in commercial properties and also loans to the sponsoring employer as an alternative to investing money in insured funds.

However, being an occupational scheme, this type of scheme was not available to the self-employed.

Personal pensions

All was about to change in 1987 with the introduction of a consultative document called "Improving the Pensions Choice", which introduced the concept of personal pensions.

Employees and the self-employed now had a greater choice and could make contributions to their own scheme, which would also benefit from tax relief.

In 1990, the introduction of self-invested personal pensions (SIPPs) created an alternative to SSAS whereby, for the first time, the self-employed could benefit from a SIPP in the same way as a SSAS benefits members of occupational schemes.

Since then we have experienced a self-invested explosion. SSASs have continued to benefit controlling directors of small companies. SIPPs, however, have grown dramatically after an initial settling-in period to the extent that it is estimated that there are more than 800,000 in existence. Their popularity shows little sign of slowing down.

Adventurous

Why is this so? The answer lies in their flexibility and the ability to control the much wider range of investments which are now available. Acceptable investments for both schemes are diverse and include options and futures, gold bullion, hedge funds and investment trusts.

For the more adventurous, there are teak forests, carbon credits, shares in unquoted companies, overseas commercial property opportunities such as hotel rooms in exotic locations, and many others.

In addition, a SSAS can still make loans to its sponsoring employer of up to 50% of the fund. The loan needs to be secured but at a current minimum interest rate of 1.5% it is considerably more attractive and easier in the current environment than approaching a bank.

If pension contributions are subject to a low return or a falling stock market, self-investment may be an attractive alternative to consider.