Better Business: SIPPs & charges

SIPP charges are slowly coming down but charging structures remain confusing for advisers and clients, writes Paul Burgin

In its 2007 SIPP review, the FSA warned clients may be at risk of being lured into higher-cost SIPPs without using the additional bells and whistles on offer that justify higher costs. For many clients, a stakeholder or personal pension may be a better deal.

Jeremy Mugridge, platform marketing manager at Skandia, says the regulator's findings were the inspiration behind its recently launched Platformwatch website. "It is obvious the FSA wants advisers to undertake robust due diligence," he says. "There is lots of information on what each SIPP provides, but there has always been a missing link when it comes to charges."

The Platformwatch website allows advisers to input case details to assess likely charges from different platforms. It now covers SIPP offers from Transact, FundsNetwork, Cofunds, Standard Life and Nucleus, as well as its own Skandia Investment Solutions funds-only pension.

Established SIPP players face increased competition over annual management charges from low-cost providers. Mugridge says: "There has been a flurry of activity recently, but SIPP pricing decisions are generally slow moving."

The country's two largest fund supermarkets have reduced their annual fees to boost their own competitiveness. But Mugridge warns: "Just because someone gets rid of its annual charge, it does not necessarily make its SIPP competitive for every client. On big investment amounts, the annual charge is actually quite negligible."

Extended offer

FundsNetwork recently decided to extend its special offer of no annual charges for life on new business lump sum investments over £150,000 placed before the end of this year. Investors still pay a set-up fee of £108. The company says its typical case is comfortably above the £150,000 cut-off, with the average transfer being well over £250,000. It has no plans to extend the offer to lower-value cases.

Standard Life recently revised its charging structure to make its offer more attractive to two different client groups. Mark Polson, head of customer management, explains: "We used to have the situation where you paid an annual management charge for the SIPP and platform together, and then an additional £240 for using funds outside of the core range. Some advisers were happy with that, others were not and wanted a completely unencumbered choice."

The company's first move was to reduce the AMC from 0.8% to 0.6% before additional discounts, making the wrap more attractive to advisers with large cases. The new charge can be further reduced by case size and volumes placed by each adviser, although any discounts are passed to the client not the IFA.

Standard Life then cut the £240 fixed fee charge for non-core funds, levelling the playing field across its full range of 2,400 funds.

Polson says: "For very large investments, the charge did not matter. But people were starting to use the wrap for accumulation. For smaller investment amounts, the charge was a bit off."

Polson admits removing the fixed fee affects revenue, but believes taking a smaller share of a bigger market will pay off.

Holding off

The company currently has wrap assets of £2.3bn. Polson says some of its 484 SIPP adviser firms have delayed more clients onto the platform: "We believe we can generate additional revenue business. SIPPs transfer and consolidation take time. Some advisers are already placing additional clients and others will start back after the holidays."

He says the move will also make it harder for other firms to come into the market expecting to make big margins. It should also place further pressure on wrap providers who outsource their SIPPs and tend to have a higher overall level of costs for the end investor.

Laith Khalaf, pensions analyst at Hargreaves Lansdown, believes advisers should not be side-tracked by the current focus on annual charges. He also worries that advisers and clients are still easily caught out by the myriad of other charges put in place by each SIPP provider. "With any comparison tool, the problem is the number of other charges and what they actually call them," he says. "It is difficult to compare which will be best for each client's assets."

The difference between 'set-up fees', 'establishment fees' or even 'initial contribution fees' may be one of semantics, but he says it does not make life any easier. "Over the past ten to 15 years, low-cost SIPP providers have changed the market, making it much broader and more appealing. Charges are important, but it is also a question of how much control and choice the investor really wants."

Hargreaves Lansdown says less than 1% of pension investors are likely to want all the asset classes and flexibility - commercial property, wine and horse for example - offered by full-blown SIPP providers.

Laith Khalaf also worries that certain flat fee structures offer little incentive to run investors' funds in their interest. He points to the change by Alliance Trust from a percentage charge to a flat £75 per year administration fee as an example.

"If your fees are a percentage of the assets under management, there is motivation to make sure that those assets grow," he says. "If you just have a flat-rate fee, there is no alignment between the client and the provider's interest, as you are likely to make most of your money on switches."

Alignment issues and the suitability of charging structures will feature heavily as the RDR takes effect. Khalaf warns it could shine the spotlight on advisers and the commission they receive for recommending insurance company SIPPs.

Christine Hallett has adopted a no-nonsense approach with her new SIPP offer from Carey Pensions UK. The new low-cost and full models do not appear particularly competitive at first glance - the low-cost SIPP costs £250 to establish and £300 per year; the full SIPP charges £350 initially and £500 per annum.

But she says: "We have gone for TCF principles and transparency. There are no fees for transfers out, no turn taken on interest rates, no mysterious banking charges and no fee for making regulatory returns."