Austin Broad goes through the issues advisers and their clients need to think about when navigating the SIPP market.
Thankfully the dark days of rigid and inflexible pension schemes are now well behind us, and advisers and pensioners alike can now benefit from the freedom that SIPPs can provide.
Advisers can select a wide variety of assets and investment channels, and similarly their clients have the freedom to change their advisers or product advisers as and when they see fit.
This is good news for everyone. Product providers need to ensure that they continue to keep their costs as competitive as possible and advisers need to ensure they continue to provide the highest quality of service.
The sky is the limit...
SIPPs can provide a wealth of opportunities and options to invest in the widest possible range of assets. The sky is the limit and this is exactly what they were designed for.
Flexibility is only good if you use it and take advantage of it. Many people pay for a SIPP and end up invested in a trustee investment plan, with limited fund availability, that could be accessed far more cost effectively without the SIPP wrapper cost. As ever, expert advice is vital.
The development of wraps and platforms has also blurred the line between a SIPP and a personal pension plan. While some plans may not be able to deal with the purchase of a commercial property or unlisted shares, they can provide a much wider architecture in collectives and direct assets such as shares, exchange-traded funds (ETFs) and investment trusts.
If a client holds many different assets individually within a SIPP and sells one to buy another, there is likely to be additional charges applied by the SIPP manager.
A much better option is to have a nominee account, or custody arrangement, within the SIPP that can deal with the execution and settlement of different assets internally as this will be less likely to create a charge from the SIPP provider.
This type of service can make actively managing a portfolio either directly or through a discretionary manager much simpler and cost-effective even though there may be an additional charge applied for the custody service.
SIPPs therefore provide a blank canvas on which any investment portfolio can be built. It allows the portfolio to be traded as actively as the client or investment manager wish. It can access the widest variety of assets both directly and through collectives.
This openness and independence means new investment advisers can be appointed without the need to transfer the plan.
Like all financial arrangements, charges are key. With SIPPs, they are likely to be fixed as opposed to being based on a percentage of the pension value. Because of this structure investors only pay for the services they need. The availability of an almost unrestricted range of assets provides an opportunity.
But for small funds or even large value SIPPs, the charges can be wasted if the investment opportunity is ignored in preference for funds that could be bought through a more general personal pension plan.
Be aware of the total cost of the facilities you need to use, and calculate the fixed charges as a percentage of the total value in order to make costs more comparable with other options. Remember to cost the other services that you are going to use when investing as these will form a part of your total costs.
Consider the investment strategy you wish to adopt and the assets that you will be investing in. In this way, you can assess the total cost of the SIPP and compare it with other options that are available.
SIPPs are not the answer to every investor’s pensions needs and should only be used or recommended where the client will benefit from the charging structure or is going to actually use the wider investment powers that they offer.
But their independence can be very powerful. It is important that the charges the SIPP manager applies are assessed regularly and the quality of their communication and other services monitored and reviewed.
Small SIPP providers often provide a very bespoke, personal service, but as they grow or are acquired by larger SIPP providers the charges can change and the services have been known to deteriorate.
The SIPP market is a very competitive marketplace and it may be possible to achieve lower costs and better service, although the cost of transfer needs to be assessed carefully given the investor's personal time horizon.
Austin Broad is technical director at AFH Wealth Management
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First mentioned in Cridland Report
Second acquisition of 2019