The risk of further changes in legislation cannot be ignored, particularly in an election year. By way of an example, tax-free cash was officially renamed ‘pension commencement lump sum’ some time ago, potentially paving the way for its beneficial tax status to be crimped or even removed in the future.
The major advantage of a Sipp is its flexibility. As lifestyle changes occur, the income level being drawn down in a Sipp can simply be adjusted. One is not tied into a fixed income level. Obviously, these rewards are not without risk. One may live longer than expected, investment returns may be lower than expected and the pension pot might not provide enough income.
However, the last Budget put Sipps into a truly advantaged position by allowing them to be passed on to any beneficiary, tax-free at death. By allowing uncrystallised lump sums held within a Sipp to be passed on before the age of 75, investments can continue to grow in a tax-free environment until being drawn by the beneficiary, again, without any tax liability at any time.
Sipps are arguably more consistent. They allow people to keep funds invested in the same suitable investments. Consider a Sipp investor in a risk grade five portfolio which has provided an impressive long-term risk-adjusted return. Does the passing of one day, retirement day, categorically mean these investments are no longer suitable? Using a Sipp to facilitate drawdown means funds can remain invested in the same suitable investments. It has been the norm for pension funds to switch into annuities or other products at retirement age, with little regard to prevailing factors such as market conditions or individual circumstances.
The flexibility of Sipps during the accumulation phase of a pension pot has been embraced, and in drawdown Sipps enable the same investments that formed part of the pension accumulation phase to be kept. This may be highly advisable in the case of certain assets, namely commercial property.
Drawdown options within Sipps will continue to evolve, ingenious investment solutions will be launched with guaranteed income, varying income options and different degrees of guarantee risk. The platform Sipp market will continue to be extremely buoyant.
Patrick Ingram is head of corporate partnerships of Parmenion
Key points
The move in 1990 to give people the flexibility to choose their own pension investments through Sipps has been hugely popular.
Sipps opened up the market by providing a means of unbundling the investment management.
Sipps allow people to keep funds invested in the same suitable investments.
