Since self-invested personal pensions (Sipps) burst onto the personal pensions scene in 1989, growth in the market has been spectacular. With the potential complexity of pensions and the sheer choice available, it is no surprise that one of the most common reasons that someone approaches an adviser is for retirement planning advice.
Two of the key areas differentiating one Sipp from another are investment choice and pricing structure. When Sipps first became available, they were seen as niche products for only the wealthiest of clients looking to invest in more esoteric investments.
The emergence of the platform Sipp has given the product a much wider appeal and driven down charges in the market. No longer is choice necessarily correlated with higher charges; the platform Sipp market continues to offer wide investment choice such as funds, exchange-traded funds (ETFs), investment trusts and even equities.
Price evolution
This evolution of the platform universe will bite into the more bespoke end of the Sipp market with fewer reasons for advisers to operate there, with perhaps commercial property purchase a notable exception. At the other end of the scale, increased choice together with competitive pricing will continue to see many advisers moving away from traditional personal pension contracts with the destination being a platform Sipp proposition.
Advisers have been criticised in the past for advising a transfer to a Sipp, with the client potentially only then investing in one or two funds. However, depending on a client’s circumstances, a platform Sipp can compete from a price perspective with a personal pension or even a stakeholder pension, meaning this represents sound advice in some cases.
There are numerous pricing options available for advisers to choose from in the Sipp market. The most common form for platform Sipps is percentage-based, which may be supplemented by an additional flat-rate charge, compared to the less widely available pure flat-fee model.
Fair’s fair
One pricing structure cannot suit all cases. While a flat-rate fee model may not be the best fit for starter Sipps with lower contributions, a platform Sipp with a 0.25 per cent platform charge could start to look expensive to a client as their fund begins to grow. Although pension transfer activity is often viewed negatively in some quarters, by looking at Table 1 it is difficult to see how one pricing model can cater for cradle-to-grave pension provision.
Another issue is how fair percentage pricing is. Do clients with more significant pension fund values realise they are effectively cross-subsidising clients with lower fund values? If an adviser charges on a percentage basis, they have to be able to evidence that their fee directly relates to the services provided to the client. Surely a platform provider should follow the same approach. Why should a platform or Sipp provider charge purely on fund value? Does it cost the platform administrator twice as much to administer a fund of £200,000 than it does £100,000, or does this depend on the client and their actions?
The Table looks purely at the cost for one year’s administration based on a competitive platform fee of only 0.25 per cent, with the reality being many charge above this level. The impact of choosing an inappropriate charging structure for a client’s Sipp can result in a significantly lower pension fund at retirement, with an obvious impact on income and the size of their tax-free lump sum entitlement.
