We live and work in a heavily regulated environment and with the introduction of RDR it all makes the long standing SIPP versus Personal Pension (PP) debate more interesting.
As part of the research we carry out, we ask Sippcentre advisers to confirm the key drivers for their pension recommendations each year and time and time again the top answers are cost, online functionality and investment flexibility.
Typically at least 90% of advisers will state that cost is the single biggest driver. The starting point for any debate on the use of SIPPs will almost always be the underlying cost. Some will argue that you can achieve the same result in a more cost-effective manner, using a traditional PP for example.
Simply stating that SIPPs are expensive when compared to PPs is a little like saying dining in a restaurant is expensive when compared to eating in your local cafe. The starting point in selecting your dining establishment is deciding what you want to eat and the type of service you require. In the same way that you have a choice of restaurant/cafe menu options, with SIPPs and PPs you are in control of choosing the product which offers the investment options you wish to use, the level of service offered, and the cost of those options being made available.
Market development
Of course another point worth emphasising is that no market stands still. In recent years the restaurant trade has seen an explosion in the popularity of establishments offering decent food and efficient service at a price which is often comparable or better than your local cafe. Anyone who has ever had the good fortune to attempt to find a seat in one of the restaurants in the Trafford Centre would attest to this.
This explosion in popularity has been matched in some way by an equivalent development in the pensions market, the growth of the low-cost, high functionality SIPP. SIPPs can now be used to build investment solutions which compete head on with PPs and platforms in terms of price and this has been a key driver for their growth.
Moving forward the market will continue to develop with one of the key influencing factors being the RDR. We may still have the traditional retail funds we know today but we will also see new share classes of funds appearing with the likes of institutional priced funds becoming more common. All of this will help advisers reduce the ultimate price of the underlying investment solution. Low cost online SIPPs are ideally placed to deal with all of this change because they allow dealing in these structures today. Personal Pensions and many of the longer standing platforms have work to do if they want to play in this wider arena.
If we look at a case study it will become clear why I think SIPPs will continue to have a major part to play as a mainstream pension solution:
Assumptions:
Male, aged 40, transfer value of £100,000, retirement age 65. The client is paying a fee direct to his adviser for the advice. Initially holds his fund in cash.
The important point to focus on here is the impact of the charges in different investment scenarios.
Using the above assumptions we are able to isolate and identify the cost of the SIPP wrapper alone which produces a Reduction in yield (RIY) of – 0.18%.
The client and adviser are of course in control of all investment, benefit and remuneration decisions and hence the total cost. If we assume that they decide to invest in UK exchange traded funds (with an average TER of 0.35% p.a.) and include adviser remuneration of 3% initial plus 0.5% trail there is a natural increase in the RIY to 1.23%.
If they consider a more sophisticated investment solution e.g. a range of collectives where the average charge is 1.60% p.a. we again see a natural increase in the RIY to 2.04%.
Any future use of additional facilities such as drawdown will of course introduce additional charges. The client will only be paying for this additional functionality as and when it is introduced to the financial planning scenario. Only by looking at the specific case can you determine the cost and answer any question of suitability.
The increase in SIPP popularity has in many ways mirrored the popularity of platforms. Low cost, on-line solutions have allowed advisers to build bespoke investment solutions with costs that compete head on with the other pension solutions available in the mainstream market.
The RDR of course throws an additional ingredient into the melting pot. Evolution of the investment solutions which the market will offer must already be considered and adds another important dynamic to the SIPPs vs PP debate.
* Note wrapper charges are based on those from the Sippcentre SIPP (http://www.sippcentre.co.uk/Sipp/Charges/)
Gareth James
Technical Marketing Manager
A J Bell