Autumn 2007
How can something so seemingly important engender such mixed,
and often negative, feelings? To the ordinary man or woman on the
street the subject of pensions will often be met with a bored look,
sometimes a roll of the eyes – rarely will this subject engage. To
the more financially sophisticated the reaction may be more marked
as a history of high profile fund failures, opaque charging
structures and schemes not fit for purpose weigh heavily on the
mind. Nevertheless, most people would wish to ensure they can live
full, and well-funded, lives through their retirement years, which
are likely to become more numerous with recent advances in
healthcare. This is something of a dichotomy within the financial
world.
It is fair to say that the financial industry
has failed to cover itself in glory when it comes to pension
provision and governments have manifestly failed to take the lead,
despite recognising that a demographic time bomb is appearing on
the near horizon. It is a huge political challenge – particularly
high on the agenda throughout the developed world – as economies
clearly cannot afford to support this growing section of their
populations. The aim should therefore be to provide sufficient
encouragement for people to take responsibility for their own
retirement years. As a consequence, the prevailing legislative
framework and the way in which the financial industry responds
through product provision are critical to the success of the
pension market.
At the basic level, the pension model can be
distilled into two distinct phases: accumulation during your
working life and spending through your retirement years. The second
phase remains a contentious one in many jurisdictions due to the
restrictions in place regarding how the fund may be used to
generate an income. The traditional reliance on annuities (products
provided by insurance companies to guarantee an income for life)
often robs savers of choice during the spending phase. The main
focus of this article is therefore the accumulation phase for which
more progressive government legislation has encouraged greater
innovation and choice in the marketplace.
In recent times, the attention of the more
financially aware has turned to the self-invested personal pensions
(SIPPs), or equivalents, as a means to build a retirement nest egg.
The basic principle involves people being able to contribute to a
pension pot and benefit from tax relief (typically with
contributions set against income tax), whilst retaining control
over the underlying investments used to generate the growth needed
to provide for the post-retirement years.
The Pensions Management annual survey for 2006
showed a significant appetite for SIPPs in the UK environment with
a 50% annual growth rate and the projection that they are to become
the vehicle of choice for personal provision in that market. The
use of more conventional investment assets to provide growth within
the pension fund is something that will continue to be
commonplace.
At Fairbairn Private Bank we have a great deal
to offer in this area. Our award-winning Focus platform combines a
flexible custody platform that holds investment assets, bank
deposits and lending in one place. Tracking, transacting and
reporting is therefore much simpler for administrators, clients and
their advisors. Whilst we are not SIPP providers ourselves, by
working with expert partners in the self-invested pension market we
are able to bring the benefits of the Focus platform to the wider
market. Additionally, for those clients not wishing to make ongoing
investment decisions themselves, we are able to manage assets on a
discretionary basis in line with underlying needs and
preferences.
With the SIPP pension structure becoming more
widely known, there is a genuine reason for savers to become more
engaged with their retirement planning. As a result, the reputation
of the pensions market may be at a turning point. This can only be
a good thing for all parties involved.