SIPPs bring on the cheer

John Moret discusses the possible impact of the recent Budget on the SIPP market

It is twenty years since SIPPs were conceived by Nigel Lawson. From a very slow start, the growth in the number of individuals investing their retirement savings in a SIPP - either in part, or in total, has accelerated dramatically. Much of that growth has been brought about by favourable adjustments to the tax regime affecting SIPPs and other pensions.

1995 brought the introduction of income drawdown which really kick-started the interest in SIPPs. 2001 saw a more prescriptive legislative regime introduced for SIPPs - which somewhat perversely appeared to drive more interest. Pensions simplification in 2006 brought with it some further growth drivers - notably higher allowable levels of contributions and true concurrency - along of course with a new taxable property regime which effectively excluded - at the last minute - residential property. New regimes and labels for drawdown emerged - with much confusion over the position post age 75. Along the way, we have also seen the DWP allow self investment of protected rights - and the operation of SIPPs being regulated. Even this arguably helped the market by providing a degree of comfort and rigour that previously had not existed.

Potential threat

This year's Budget proposals contain the first serious legislative threat to the SIPP market. The threat is contained in the provisions to restrict higher tax relief for 'high earners' - linked to the introduction of higher rate tax of 50% from April 2010 and loss of personal allowances. Arbitrarily a 'high earner' has been defined as someone who earns more than £150,000. In practice, those with salaries well below this threshold could be affected as income from other sources such as bonuses, maturing share schemes and buy-to-let income will need to be taken into account.

The prospect of higher rate tax relief on pensions being curtailed had been well trailed - partly as a result of the well publicised pensions excesses in the banking sector. I think most well informed individuals accepted that if introduced sensibly, fairly and gradually this was not unreasonable. We should have known better.

On pensions policy, this government has a track record of U-turns (residential property), inconsistency (ASP), unnecessary complexity (recycling of tax free cash) and inequity (public sector v private sector). Once again these latest proposals display all these traits.

U-turn, or in this case, worse retrospection - the phasing in proposals (anti-forestalling measures) affect anyone who 'earns' £150,000 or more this tax year or in either of the two previous tax years. A-Day changes on allowable contributions provided individuals - including those now defined as high earners - with the ability to pre-fund or defer making pension contributions. This was on the understanding that provided they did not exceed the annual allowance and did not exceed the lifetime allowance there would be no tax charges and the rate at which they funded their pension would be down to them - subject to having adequate earnings. That understanding goes out the window with these changes - a high earner who put off funding their pension will be hit, whereas those who took early action will be far less affected.

Inconsistency and inequity - no justification is given for deciding high earners are those earning more than £150,000. Worse in the run up to 2011, it appears that benefits accruing in defined benefit schemes will be protected from the special charge applicable to those in DC schemes who save £20,000 or more (unless they can justify this as regular savings).

Complexity - oh for those heady days of 2002 and 2003 when pensions simplification appeared to be a genuine objective. If we needed proof that pensions simplification is dead, then 52 pages of a technical guide to introduce a simple tax change for a two year period is pretty conclusive.

Need for clarity

Once again the lack of a coherent and consistent pensions savings policy is clear. The lifetime allowance was supposed to cap the tax relievable pensions savings for all. It is extraordinary that the Chancellor should say that it is difficult to justify 25% of all tax relief on pensions savings going to the top 1-1.5% of pension savers when it was the same government that brought in the simplification changes. What did they expect? Isn't the real point that through the above traits, they have destroyed the confidence of the majority in pensions savings - if middle earners saved at the rates needed to provide adequate incomes in retirement then that 25% figure would be a lot smaller. The case for an independent arbiter of pension policy has never been stronger.

Yet despite the above, I believe these proposals will have only a limited impact on the SIPP market. Although we don't necessarily have information on contributions that may be being paid into other pension arrangements, an analysis of our own SIPP portfolio suggests that around 6% of our SIPP investors made contributions of over £20,000 in tax year 08/09 and earned over £150,000. Also, a large proportion of SIPPs are funded in part, or in total, by transfer values from other schemes - and there are an awful lot of assets that are still waiting to be transferred. Clearly, suitability remains a key consideration, but there are many reasons why investors like SIPPs - and many reasons to be cheerful about the future for the SIPP market.