Sipps — it sounds as painful as a dose of the clap and as debilitating as a case of the yips. In other words, something to be avoided at all costs. But behind the acronym, Sipps offers an alluring way ahead for the British pension contributor. Self-invested pension plans (Sipps) have been on the market for about a decade. But the Treasury is about to rewrite their fine print in a way that threatens to bring a dash of exoticism to the grey world of pension provision. Holders of Sipps can currently place investments only in stocks, unit trusts and investment trusts into their pension funds. But that all changes on A-day — April 6, 2006 — when the new rules come in. They will allow pretty much any asset to be lumped into a Sipp fund. That includes, for instance, a holiday home, even one abroad, fine wine, fine art, a classic car, a yacht. And — this is a good bit — Gordon Brown will write a cheque to your pension fund for 22 per cent of the asset ’s value, or 40 per cent for high-rate taxpayers. Wine! Yachts! On the taxpayer! But it is not quite as simple as that.
First, a step back. Britain is facing a pension crisis, largely because not nearly enough adults of working age are putting money aside for retirement, and the Government is right to take steps to avert it. Sipps are commendable because they give pension holders more control over the make-up of their funds. The looming reforms will increase that control, and are therefore to be welcomed. They will hopefully encourage more workers to think about retirement, and may also stir the interest of pension providers, many of whom have cut their provision because of tepid demand.
There is a danger, though, that the new-look Sipps will begin to look like the goose that lays the golden egg. The reality is a little more prosaic. An investor who assigns a classic car to a Sipp loses ownership of that vehicle. It belongs to the pension fund and is held at arm’s length. The holder cannot look at it, let alone drive it. A Hockney cannot be hung above the mantelpiece (although it can be lent to a gallery). Similarly, those who find the idea of buying a holiday home a good wheeze may get clobbered for income tax by the host country. This last point is a recipe for financial trouble.
As well as the pitfalls, there are also potential disasters. In micro terms, pension holders who use all their pension funds to buy second homes face a penniless retirement if the property market collapses. On the macro side, if the popularising of pensions is successful and take-up is substantial, the changes could cost Mr Brown billions of pounds in lost revenue and could stoke a housing market that has just been tamed. In the middle, first-time buyers in scenic areas could find themselves further priced out of the market.
One reason the British property-owning democracy has broadened in recent years is that the mis-selling of private pensions was so grievous. Property looked a safer bet. There is also a huge potential for mis-selling. The scandal of endowment mortgages is still fresh, and misleading adverts about Sipps are already appearing. The reforms to Sipps are a good idea, as is the Treasury’s signal that the funds are likely to be regulated by the Financial Standards Authority. But Mr Brown’ s officials have only six months in which much more work must be done to clarify and tighten the regulatory framework. If Sipps go wrong, we will all end up paying