The Government’s announcement that proposed changes to self-invested personal pensions will not be going ahead next year has drawn criticism from the industry, which says it severely hinders the way in which pensions can be marketed. By David Benady and Catherine Turner
Just as the normally staid world of pensions was threatening to become exciting, Chancellor of the Exchequer Gordon Brown got cold feet. His announcement last week that many proposed changes to self-invested personal pensions (Sipps) would not go ahead next April as planned has been described as “a disaster and a shambles”. It is seen as a symptom of the Government’s inability to tackle the pensions crisis.
The new rules would have allowed people to use their pension funds to invest directly in residential property, fine wines, works of art and classic cars. It was effectively a tax giveaway, offering the chance to buy holiday homes at a huge discount. There was evidence that pensions were finally being viewed with excitement, with talk of a rush on luxury goods. But now that Sipps will continue to be restricted to investments in the stock market, commercial property and investment and unit trusts, the world of pensions appears as dull as ever.
The U-turn has pulled the rug from under the feet of a number of pensions providers, such as Standard Life and the many independent financial advisers (IFAs) who have spent an estimated &£20m preparing for “A-Day” on April 6, when the changes were due to come in.
No changes, no relief
Many people had already invested in buy-to-let properties in the belief that they would get 40 per cent tax relief for their pensions. Now that the changes to Sipps will not come into effect, these people will be left out of pocket. The changes were proposed two years ago, amid warnings that they would benefit a handful of fat cats at the expense of the less well-off. It would have entailed funnelling more than &£2bn of taxpayers’ money into the wallets of the country’s rich. The avowedly socialist chancellor has changed his mind at the 11th hour.
Most high street brands have steered away from making the new Sipps arrangements key to their marketing, as their customers do not rules would have principally benefited. But it is thought that some niche pension providers will be destroyed by the U-turn. For pensions company Standard Life, which made the scheme a central part of its proposed demutualisation strategy, the changes are a severe blow. It claims it has already invested &£500,000 on Sipps in preparation for A-Day, much of that spent on customer research.
Pensions marketing director Barry O’Dwyer says: “Sipps have been around since 1990, and we launched a new product in 2004 that has been very successful. We made a number of changes to our other pensions products and made Sipps very attractive compared to those in terms of charges and commissions. It is disappointing that what we saw as a major product line isn’t going to grow as far as we thought.”
Standard Life calculates that the April changes would have added ten per cent to the size of the pensions market – an extra &£200m every year. With profit margins of about five per cent, this means the industry will miss out on about &£10m of extra profit a year.
Meanwhile, a spokesman for L&G Mortgages says that if Brown had not introduced these measures, it would have had a disastrous effect on the housing market, driving up prices for first-time buyers. He adds: “Rather than help the average person save for retirement, the proposed Sipp rules had the potential to help the rich get richer. But some sympathy must be felt for those people who had put plans into place and incurred costs in preparing for A-Day.”
A waste of time and money
The ramifications go far beyond the companies offering Sipps, he says, as many lending organisations poured time and money into finding ways to offer mortgages to trusts rather than individuals. Worst hit will be financial advisers, says Lucian Camp, chairman of financial services ad agency CCHM:Ping. “Generally speaking, major players have been cautious about big marketing campaigns for property, fine wines and classic cars. But this is bad news for the ‘second-division’ characters hoping to make a few bob.”
Camp says as many as 10,000 people were putting deposits down for properties to take advantage of the proposed changes. “From a consumer’s point of view this decision is disastrously late. It will blow a hole in the plans of financial advisers.” He adds that the financial services industry missed a trick earlier in the decade when proposals were put forward for IFAs to charge fees rather than commission: “The industry was up in arms, forcing the government to backtrack.”
Some of Brown’s initiatives have helped to cause the pensions gap many are now facing, he believes. By taking extra tax out of company pension schemes, Brown has garnered &£60bn for the Treasury, one of the reasons Camp believes there is now a pensions crisis. “The Government has been getting it badly wrong,” he says, pointing to the fiasco over stakeholder pensions, and the cost and manpower involved in introducing Child Trust Funds, which have been met with apathy. “The Government is not very good at financial services product development,” he adds.
In recent times, the average tenure of a pensions minister had been shorter than that even of a marketing director – there have been five in the past five years. This underscores the Government’s failure to solve the pensions crisis. Dr Ros Altmann, an independent pensions policy adviser at the London School of Economics, who has also advised Downing Street, agrees that closing the Sipps “loophole” was essential. But she says the way it was done has hindered the marketing of pensions, and suggests that many young people could be better off not investing if policy continues in this vein.
“How can anyone have any trust in the Government?” she says. “This was in legislation already. It is very difficult to overestimate the impact that this will have. It feels like a mis- selling of pensions, particularly to anyone who already put money in, although it may not be in a legal sense.
A long way to go
Altmann adds: “We are no closer to simplifying pensions or to any restoration of confidence. Having said that, if the legislation had gone ahead as planned there would have been mis-selling of schemes for a large number of people.” Altmann says Adair Turner’s recent report on solutions to the pensions crisis indicates future possibilities, but the Government poured scorn on them even before publication. She blames the Pension Credit, a means-tested top-up introduced in 2003, for discouraging people on basic tax rates from saving because of the huge effect it would have on private pensions, devaluing them by as much as 40 per cent. Employers also have no real incentives, she claims.
Putting people off pensions
“Consumers have lost trust in pensions because of a series of scandals and the fact that it has been far too complex a system for too long,” she says. “How can people be expected to put in to pensions? It is entirely rational in the current environment not to put money into pensions.”
As ever, the financial services industry is waiting to hear how the Government will resolve the crisis. It is likely to be a long wait.