Investors move work pensions to self-invested schemes

By Matthew Vincent and Ellen Kelleher

Published: September 7 2007 17:57 | Last updated: September 7 2007 17:57

Copyright The Financial Times Limited 2007

Link to FT.com Article (opens in new window)

Members of company pension schemes are leading an “exodus” of funds into self-invested personal pensions (Sipps), as more employers close their defined-benefit, or “final-salary”, schemes to new members. But employees are being warned to check the terms of their transfers, and the type of Sipp they use.

According to the Association of Consulting Actuaries, 81 per cent of defined-benefit schemes are now closed to new members, and the number of schemes no longer adding benefits linked to years of service has increased to 14 per cent – from 10 per cent two years ago. This is causing members and scheme providers to seek transfers into Sipps, said pensions consultancy Mattioli Woods, following its financial results this week.

“Chief executives are winding up their company pensions, so there’s an exodus of funds from final- salary schemes,” explained executive chairman Bob Woods. “We know there’s been a sprinkling of employers embarking on programmes to encourage a transfer out, by offering enhancement.”

But it’s not just members of final-salary schemes that are transferring to Sipps. Hargreaves Lansdown, the UK financial advisory group, is also seeing a surge in customers moving money from their company pensions – and the bulk of these are coming from money-purchase schemes as the hand-overs are easier to arrange.

For money purchase schemes, the starting point for the transfer is the cash equivalent value of the pension fund. For final-salary schemes, though, the actual worth of the benefits payable needs to be worked out. These figures are typically calculated by accountants who project how much the money will grow over time.

“If you’re transferring money into a Sipp from a final-salary scheme, it’s as if you’re comparing apples with bicycles,” said Tom McPhail, head of pensions research at Hargreaves Lansdown. “The costs are higher as you have this almost unknown penalty implicit in your transfer value. It doesn’t work as well as it does when you’re transferring funds from money purchase schemes.”

However, if employers offer enhanced transfers from final-salary schemes, a Sipp can prove very beneficial. Mattioli Woods points out that a 58-year-old man offered an early-retirement pension of £38,500 from a company scheme could opt to stay in the scheme for an extra four years and get a pension of £45,000, or take an enhanced transfer into a Sipp, which would produce a maximum drawdown pension of £75,000 at age 62 (assuming 6.5 per cent annual growth).

What’s more, the cost of transferring money to a Sipp is minimal, as fees for trading and advice tend to fall between 2 and 4 per cent of the total transfer, according to Hargreaves Lansdown.

As a result, the number of Sipps being taken out looks set to double in the next two years. Already, there are estimated be a quarter of a million plans in use – up from just 25,000 in 1995 – and the rate of take-up is accelerating.

“There was 30 per cent growth in 2006, so if it grows at 40 per cent this year, there could be half a million by 2009,” says Woods. Standard Life believes the potential target market is 3m-7m customers.

But investors need to ensure they’re transferring to the most appropriate type of Sipp. Provider James Hay this week warned that one in eight Sipps are now low-cost plans bought “off-the page”.

“This raises the possibility that people are investing for their retirement without taking advice from a suitably qualified professional adviser,” said e-commerce manager Chris Smeaton.

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