The internet is making it easier to transfer from a personal pension but the time the process takes will still depend on the speed of the current provider's administration system
There seems to be irreconcilable pressure on insurance companies to reduce personal pension costs and at the same time increase the fund range and choice of external managers. This could be good news for the low-cost Sipp providers who stand to gain from the growing consumer dissatisfaction with traditional product structures.
The full Sipp, with its access to direct equity and bond investments and commercial property is still the most flexible pension product on the market. However for investors with more modest demands and who might expect modest returns the rapidly increasing number of low cost options may provide an affordable solution. The fact that these plans can also hold cash is a very useful facility when markets are volatile.
An estimated 100,000-plus investors have discovered the advantages of Sipps so far and this number is increasing by about 40% a year. They are becoming particularly popular in the pre-retirement market where clients use a Sipp to consolidate their pension plans and often continue to hold the Sipp after retirement, making use of the flexible drawdown facility.
Providers can reduce the annual costs of Sipps in a number of ways so it is important to assess the client's needs before selecting the right product in terms of the investment choice, levels of service and charges.
Some companies, like Alliance Trust, restrict the investment options to a range of direct equities, bonds and collective funds. Hargreaves Lansdown offers a fund-only Sipp as an alternative to a multi-manager personal pension and here it is important to compare like with like to determine which is the right option for both adviser and client.
Other Sipp providers, like Schwab, offer an execution-only service, while EPML, Nothing Ventured and Sippdeal offers an online version of the product, known as an e-Sipp. Rather confusingly there can be several companies involved in one transaction including the provider, the trustee and administrator and a company that fronts the service.
Fergus Lyons, commercial director at Sippdeal, urged advisers to check the credentials of each component part. 'It is a legal requirement that each Sipp has a provider ' normally a bank or insurance company, ' he said.
'In practice, the provider delegates all day-to-day activities and responsibilities to a trustee and administrator who will manage the scheme. However, should things go wrong, ultimate responsibility rests with the provider so it is important to check its financial strength.'
Clearly it is also important to check how easy it is for the client to switch to drawdown. Taking the Sippdeal e-Sipp as an example, here clients can log on to their account and use the benefit projector, which calculates the maximum tax-free cash they can take and the minimum and maximum annual income allowed, based on the current Inland Revenue rules.
Once clients submit their requirements the cash is paid into a nominated account within five working days and they can start to draw an income on a monthly, quarterly, half-yearly or annual basis.
Until 2002 Keith Drysdale was happy to stick to with-profits funds for the bulk of his pension investments.
'I was delighted with the return over the years but more recently became concerned the smoothing process and falling stock markets had undermined the liquidity of life companies,' he said. 'The result has been a reduction in bonuses for those who remain loyal and the application of market value adjusters for those who want to get out.'
Mr Drysdale, now age 65 and fully retired, was one of the lucky ones who transferred out of his Standard Life with-profits fund last autumn before the latest round of bonus reductions were announced and the 20% exit penalty was introduced.
As a stop-gap measure, he moved into a deposit fund while he was considering how to use his pension arrangement to generate an income.
Like many investors who have worked hard to build up a substantial personal pension fund, Mr Drysdale dislikes the concept of annuities and decided to explore the Sipp route, using the plan for drawdown. 'With a Sipp I keep control of the fund,' he said. 'While under current rules I must buy an annuity by age 75, it seems hopeful the rules will become more lenient.'
For those who die before drawing an income, the whole of the Sipp fund can be passed on to the beneficiaries tax-free. Mr Drysdale plans to take his tax-free cash immediately and start taking an income from April. If he dies after he has started to take benefits, his wife can continue to draw a taxable income directly or convert the fund to an annuity. Alternatively, she can take the fund as a lump sum, less a tax charge of 35%. These options are more flexible than are available under an annuity.
Given the volatility of stock markets, Mr Drysdale was keen to find a low cost Sipp. 'This means I don't have to chase high returns to cover the high fixed costs that seem to apply to many other Sipps,' he said. 'I looked into several companies listed on the Sipp Providers Group website (see box) and decided to go with Sippdeal, an online provider.
'The website is easy to use and downloading the documentation is a simple process, while the charges seem to be transparent and acceptably low.'
Sippdeal charges a set-up fee of £100 and there is no annual management charge. The investment range includes UK listed stocks, major US and European stocks, warrants, gilts, corporate bonds and about 2,000 UK unit trust and open ended investment company funds.
Mr Drysdale's transfer from Standard Life to Sippdeal took three weeks. Sipp- deal's online application provided a transfer request form, which he sent to Standard Life. He did have to prompt the company by phone on one occasion to speed up the issue of the formal transfer discharge form. Once received, he signed this and sent it to Sippdeal, which completed the relevant information and returned it to Standard Life.
Lyons at Sippdeal said: 'Depending on the existing provider's administrative procedures, we would expect a cheque or electronic payment to be issued to us within five to 15 days. When we receive this we notify the client by email.
'Once the funds have cleared in the nominee account with our provider, the Bank of Scotland (four working days for cheques, one working day for electronic payments) the client can purchase investments from the account.'
This proved to be a very quick and largely trouble-free transfer but in practice problems can arise due to the different administration processes used by life offices. It is important for the adviser to make sure each party responds quickly to requests for information, particularly where forms are exchanged between the existing and new provider via the client.
In the above box we list the providers that can be described as low cost for those who handle their own investments. Very active investors should also consider companies that have a higher annual charge but have low transaction costs. Clearly, where the client requires commercial property investment, it is essential to look at the specialist nature of the provider.
Full details of all Sipp providers, including property specialists, will be available shortly in a forthcoming Investment Week special supplement. In the meantime, for a wider choice of companies visit www.sipp-provider-group.org.uk. Bear in mind that some of the companies listed limit the investment choice, so do check the range is suitable.
Increasing dissatisfaction with the inflexibility of personal pensions will encourage more people to transfer to a Sipp.
Where charges are critical make sure the low-cost provider offers the right service and investment range for the client's needs.
The flexibility to be able to switch into drawdown is a vital feature.
More than half of people over the age of 55 see financial security as a top priority in retirement, yet a third allocate more time to buying a new car, research from Legal & General (L&G) has found.
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Alongside Barrett, Hopkins, Boston and Thorman on 17 October