5 mins read By Anton Padmasiri
How did the Self-Invested Personal Pension Plan (SIPP) go from a High Net Worth Individual (HNWI) focused niche product to the leading vehicle for the mass adoption of private retirement savings and income? Anton Padmasiri, WealthOS Founder/CEO and pensions geek at heart, takes us through the evolution of the SIPP — back from the future!
First, let’s visualise the future of the SIPP
As digital transformation of the broader wealth management sector picks up, we see the SIPP as the key vehicle through which the modern digital retirement savings, consolidation and income experiences will manifest themselves
Robo-advisors and digital trading apps offer SIPPs as a core offering for new money and consolidation. Several pensions-specific digital offerings are trying to solve everything from consolidating disparate/lost pensions held by individuals into a single plan, to closing the gender-pensions-savings gap. All, use the SIPP as their product of choice around which to centre their propositions.
The changes taking place in the broader pensions market, regulatory framework, technology and customer demand are likely to continue increasing the place of the SIPP as a key solution in the overall retirement market. For clients who want to access features like trading bonds and fractional shares, as well as new asset classes like new digital/tokenised/blockchain-driven assets in their retirement pots, SIPPs will be the vehicle to hold them.
The way individuals take their retirement benefits is changing, from a cliff-edge point of time to a more staggered approach. Income drawdown coupled with the flexibility of holding a wider range of investments, wrapped in a seamless digital experience will set the standard for future retirement income propositions.
How to determine future winners in the SIPP market
Do they have propositional strength?
Future market leaders will offer a product that enables clients to most creatively leverage all the benefits SIPP rules have to offer — e.g., how to accumulate and consolidate assets, provide opportunities to grow those assets through access to a wide and global range of investment options and the flexibility to drawdown in all the different ways that consumers need to generate retirement income.
Do they provide a strong customer experience?
All the propositional flexibility, while important, isn’t going to be sufficient to stay ahead of the pack unless they are organised into a great customer experience (CX) that is digital-first with omnichannel flexibility. Some of the key areas of CX that will make a provider stand out are:
- Ease of paying into the SIPP and ease of consolidation
- Finding great investment ideas and executing them
- Rich dashboards and tools to keep tabs on the pensions
- Flexibly managing the drawdown of assets in retirement years
Are these provided at a competitive price?
SIPPs used to be expensive products. But the proliferation of SIPP offerings in the market as a response to the increase in demand has seen price points for basic SIPPs (those that offer limited investment choices and no drawdown) go down dramatically. However, the definition of a basic SIPP will continue to expand to include wider investment choices and drawdown features. Those providers whose price point doesn’t reflect that may see assets flow out into more nimble competitors.
Investing in a modern SIPP tech stack can help organisations win this market. Compliant handling of the SIPP rules, automated workflows and APIs for digital connectivity, and scalable and maintenance-light cloud infrastructure can provide the foundation for building the next generation of retirement savings and drawdown experience.
Warning – product placement ahead.
This is where WealthOS comes in. We are the only cloud-native and open API-supported SIPP software combined with essential features like trading, payments, transfers, fees, portfolio management and much more. WealthOS will provide all the necessary tech and infrastructure, at an accessible price point, for a category-leading digital SIPP accumulation and drawdown proposition. It also prepares you to be fully and easily compliant with the pensions dashboard and exploit the opportunities that arise when it goes live.
And now back to SIPPS.
How it all began
The eighties are known for the major reconfigurations that took place within the UK economy in the form of privatisation, financial market deregulation and transformational tax reforms. One key outcome of these reforms was the tax incentives provided to individuals to save and invest more of their monies. During this time, products like the Personal Equity Plan (PEPs) were introduced, regulations relaxed for the types of securities that can be held in such products (e.g., individual shares and collective investments), and save-as-you-earn schemes were expanded.
In 1989, Nigel Lawson introduced Self-Invested Personal Pension Plans (SIPPs), extending the philosophy to pension savings. SIPPs expanded the investment types that can be held in a personal pension and afforded savers a high degree of investment decision-making authority. Consumers could now invest in commercial property and borrow against the value of their SIPP — which opened opportunities for sophisticated investment strategies.
Initially, SIPPs were only offered by specialist players. The value chain was inevitably fragmented because several counterparties had to come together to accommodate the new expansion of investment types held in SIPPs.
To illustrate — if you wanted to hold shares in your SIPP, a stockbroker firm had to provide the execution and custody services, whilst a bank had to provide an account to hold cash. In the meantime, the SIPP administrator — through whom the client will have procured the SIPP — had to liaise with the stockbroker and the bank regularly to ensure records are kept accurately and reported back to the client and HMRC. Pre-internet, the customer experience of this offering was exclusively analogue.
For over a decade since its inception, the SIPP remained a niche product used by HNWIs to hold non-standard assets.
For example, partners of a GP practice would transfer monies from their disparate pension pots like Additional Voluntary Contributions (AVCs), Free Standing Additional Voluntary Contributions (FSAVCs) and personal pensions into a group SIPP, borrow against the value of their SIPP and purchase a building from where they would operate their practice. Making the entire process highly tax efficient. The GP practice would pay rent to the SIPP and receive business tax relief. The SIPP receiving the rent would enjoy that income tax-free. At a future date, if the building was sold, any capital gains would also be free of taxes.
With the evolution of regulations, and business models in pensions and technology, SIPPs became attractive to other market segments. The first of these changes was the introduction of income drawdown in 1995 — an alternate means of taking pension benefits instead of purchasing an annuity. A SIPP’s ability to hold cash, gilts, individual bonds, etc., allowed individuals to structure an income stream without having to buy an annuity thus preserving their capital. In the grander scheme of pensions, this was still a very small proportion of the market, which was predominantly, if not exclusively, HNWIs.
The mass affluent penetration of SIPPs started in the mid-00s. “A-Day” pension regulations brought SIPP regulation under the purview of the FSA (now the Financial Conduct Authority, FCA) and further liberalised the income drawdown rules. Technology enabled new wealth businesses like fund supermarkets and investment platforms (business models that brought open architecture distribution of funds and democratised access to share dealing via phone) to offer simple SIPPs as a tax wrapper option alongside general investment accounts and Individual Savings Accounts (ISAs).
There was also a vertical integration of the value chain — where pension administration, investment operations, custody and cash services sat under a single roof, making the customer experience more joined up.
The introduction of Automatic Enrolment (AE) from 2012 to 2019, led to another major shift in the UK pensions landscape. Indirectly, SIPPs ended up benefiting from the new law as it resulted in most working citizens accumulating pensions as they climbed their career ladder. So now, we find that most people have a minimum of two workplace pension pots, with at least one being closed off to new contributions. Keeping track of these pensions is a problem. Cue the SIPP as a new choice for the mass market to consolidate their past and present workplace pension pots. With the upcoming pension dashboard, SIPPs could very well be the ‘one product to rule them all’ where consumers can tidy up their pensions – consolidating disparate pots into a cohesive and manageable offering.
In 2015, the liberalisation of the drawdown rules made SIPPs the go-to vehicle for savers to access their defined contribution pension through tax-free cash and drawdown. This caused the annuity to fall away as the main vehicle through which to access retirement savings and for flexi-access drawdown and uncrystallised withdrawals to take its place. It didn’t help that interest rates at this time were rock bottom making annuities, pegged heavily to gilt yields, to be even more unpopular. This also increased product innovation in the drawdown sector with features like phased drawdown – that could make withdrawals more tax efficient.
In the current decade, we see how the SIPP has entered the mass market and broken through to new segments like Millennials and Gen Zers. Mobile first propositions allow everything from round-up savings to meme-stock trading at very low fees. The increased engagement, through much more fun CX, will no doubt result in the younger generation seeking to consolidate their auto-enrolled pension savings into them. And this will be made far easier when the pensions dashboard goes live.
And this, my friends, “is a faithful narrative of all my” knowledge of the evolution of SIPPS. To find out more, contact us or take our platform for a test drive (for free) in our sandbox and get in the race!