What are self-invested personal pension (Sipp) schemes?
Self-invested personal pensions (Sipps) are a type of retirement plan that gives people more control over how their money is invested. Employers can offer these to their staff in the form of a group or workplace Sipp, enabling them to make contributions towards their retirement fund.
Rather than each employee setting up their plan independently, the employer chooses a provider, which is authorised by the Financial Conduct Authority (FCA), and offers this pension option to staff as part of their benefits package. Although it is part of a group scheme, the employee’s pension investment is treated as an individual contract between them and the scheme provider.
Unlike most workplace pensions, a group Sipp allows employees to choose where their money is invested, including stocks and shares, bonds, and property, just like a regular Sipp. However, a group Sipp can offer a wider range of investment choices, including commercial property investments, due to the greater purchasing power that comes with a group Sipp.
Typically, all of an organisation’s employees are eligible, although this may vary depending on the employer’s criteria. The employer will usually contribute to each Sipp, just as it would with a more traditional group workplace pension scheme.
A group Sipp can be a valuable employee benefit in terms of attracting and retaining talent, and are particularly popular with senior leadership and management teams. Providing access to a Sipp can help employees plan for their retirement and potentially improve their financial stability. Employers benefit from tax relief on their Sipp contributions.
What are the cost implications?
Costs vary between providers and include set-up fees, annual management fees, dealing and transaction charges, administration fees, and fund-specific charges, for example, underlying charges associated with the funds or assets chosen. Costs can also be affected by the provider’s system of administration. For example, providers that operate predominantly online or are app-based can offer a low-cost option for those employees who do not expect to have wide investment choices. Full-service Sipp providers are likely to charge more but can offer a greater degree of investment choice and freedom.
Are there any tax or legal issues?
Sipps are taxed as an HMRC-registered pension scheme and benefit from favourable tax treatment on contributions paid in and benefits paid out, including tax-free cash, within certain statutorily defined limits.
Contributions made by the employer to employees’ group Sipps are generally tax-deductible as a business expense but are not subject to employer national insurance (NI) contributions. If the group Sipp is operated with a salary sacrifice arrangement, employees agree to reduce their gross salary in exchange for additional pension contributions.
A group Sipp is not a qualifying workplace pension scheme for auto-enrolment unless it meets specific criteria, such as minimum contribution levels and default investment options. Employers must still comply with auto-enrolment duties, which may mean running a separate auto-enrolment scheme alongside a group Sipp.
Employers must ensure that the chosen Sipp provider complies with all relevant pension regulations, while employees must regularly review their investment choices and make adjustments as and when needed. They can manage their investments actively or passively, depending on their risk appetite and investment expertise. Some employers consider offering employees access to investment advice to help them make informed decisions about their Sipp investments.
What are the current market trends or developments?
The Sipp market has seen several key trends emerge in recent years, most notably an increased appetite among investors for greater flexibility and control over their retirement savings. This has led to greater digital innovation in the market, with providers offering more intuitive online platforms and digital tools to make it easier for investors to manage their Sipps, monitor performance, and make changes to their investments.
Another emerging trend noted by digital pensions provider Penfold is the growing popularity of low-cost investment options, such as exchange-traded funds (ETFs) and index funds, alongside a rising interest in sustainable, environmental, social, and governance (ESG) investments.
In recent years, the FCA has implemented several measures to enhance the promotion and investment offerings of Sipps in the UK, with a focus on robust due diligence by Sipp operators, especially concerning non-standard investments. This has positively impacted how Sipps are promoted, and the diversity of investments, creating a more transparent environment for investors planning retirement.
Who are the main providers and what types of schemes do they offer?
There are more than 60 established commercial Sipp providers operating in the UK, including specialist businesses operating alongside large insurers and investment firms, offering a range of products aimed at a diverse audience comprising people requiring different levels of involvement in their retirement savings. Leading names include: AJ Bell, Curtis Banks, Fidelity, Hargreaves Lansdown, Penfold, Standard Life and Vanguard. Consolidation has reduced the number of providers in recent years, but it remains a competitive market.
