Choosing the best tool for the job

Mary Stewart looks at the different types of SIPP available and discusses the need to ensure the client has the best SIPP for their needs.

Any DIY devotee will tell you that making repairs or improvements is far more straightforward if you have the right tool for the job. Exactly the same principle applies in the world of self invested personal pensions.
The rapid growth of SIPPs in recent years has been driven by the desire of individual pension savers to take direct responsibility for their own pension strategies. The success of this hands on approach contrasts sharply with the arms length traditional personal pension which has fallen out of favour for reasons such as poor investment choice, underwhelming performance or questionable value for money.
The credit crunch has, if anything, reinforced this trend. SIPP numbers grew by about 20% last year to more than half a million with upwards of £50 billion of assets under management. There are more than a hundred providers to choose from and despite talk of consolidation, new ones continue to appear ­ hoping to take a slice out of a market that is destined for continued strong growth.
Such a vibrant and competitive market has clear benefits to both financial advisers and their clients. But it also presents the challenge of sorting through all the options to pick the best tool, that is the SIPP that most suits the clients' requirements ­ not only in the short term but preferably through all the accumulation years and deep into the retirement stage.
Burgeoning sales of SIPPs has led to increased scrutiny of the market by the Financial Services Authority, in our view a necessary development if consumer confidence is to be maintained over the long term. SIPP operators have been regulated since 2007 and since then the watchdog has completed an investigation into pension switching advice including switches into SIPPs from other types of scheme, and more recently it announced a review of 70 small SIPP firms to assess whether they are adhering to its principles and rules.

Regulation
The reality is that regulation and compliance is likely to become more onerous over time. Add in the turmoil in the financial markets and the failure of several high profile financial institutions and it is easy to understand the FSA's stance. Its scrutiny is putting more pressure on advisers to review their own procedures to ensure they are complying with Treating Customers Fairly principles and also to look closely at the SIPP providers they are recommending. This not only means looking at what kind of SIPP is being recommended and its basic functionality, but also the financial strength of the operator, how the SIPP is structured and how it is paid for.
Advisers conducting due diligence on the provider need to cover a host of factors, ranging from its ownership, composition of the board including non-executive directors, its corporate governance arrangements, the safety margin in terms of its capital adequacy situation and its risk management and disaster recovery plans. Providers with a long track record in the self-invested market ­ perhaps covering small self administered schemes
(SSASs) as well as SIPPs ­ are more likely to have built up strong administrative experience. You can also tell a lot from a provider's attitude and reputation ­ is it known for being client-focused and keen to let them use the full flexibility the rules allow, or are their extra layers of rules imposed that can mean extra expense or even a refusal to comply with the client¹s wishes?
This is one of the key differentiators between SIPPs because not all are created equally. A true SIPP allows the widest choice, not only of assets that can be held, but also over the professional expertise and services provided to the SIPP ­ wealth managers, solicitors, lenders, etc ­ and also the range of options during the decumulation phase.

Extra flexibility
The structure of the SIPP can also provide important protection and extra flexibility. Many SIPPs operate under a master trust arrangement with the client¹s assets pooled under the control of a single trustee. Should the provider run into financial problems, all the clients would have to queue up to identify and claim their assets.
We favour a supplemental deed arrangement where each client is a co-trustee of their own scheme which means they are also co-owners of the assets. This structure allows easier identification of the assets and, in the event of failure, enables the client to appoint a new SIPP provider. The client can choose to authorise all transactions whereas this would not be required where the assets were held by a third party trustee company. In this case a trustee could theoretically block a transaction if it believed it was not in the members¹ interests, whereas the co-trustee has more autonomy to push ahead with their own decisions. In addition, we allow clients to be co-signatories on their bank accounts, ensuring no money moves without their knowledge and approval. These are all extra levels of control and security offering peace of mind to clients in both the good and bad times.

Different types of SIPP
Of the hundreds of SIPP providers that exist, perhaps only a handful now offer true SIPPs. The bulk of the market is made up by low-cost online services, insurance SIPPs and hybrids which tend to be reasonably priced, provided the bulk of the investment remains within the insurer¹s own funds, and IFA provided SIPPs aimed mainly at offering a discretionary fund management service.
We see a steady stream of transfer business where a client has started with a basic requirement to invest in funds, shares or gilts but has moved on to a more sophisticated strategy involving alternative assets such as commercial property, unlisted shares, gold bullion, traded endowment policies or foreign currency that could not be accommodated.
Almost by definition, SIPPs appeal to the activist investor. Many want to use the flexibility to either safeguard their existing assets or take advantage of new opportunities, or to support their own business objectives.
The reality is that many providers impose their own restrictions.
At present we are seeing a growing trend for SIPP clients to loan cash holdings out to third parties. This makes perfect sense at a time when asset prices are still volatile and banks have been reining in lending to the point many borrowers are either facing paying high interest rates or are being refused credit altogether. Her Majesty's Revenue and Customs allow loans from SIPP provided they are prudent, secure and at a commercial rate.
Clearly SIPP investors can see the potential for good returns by following such a strategy, but the fact is that the vast majority of SIPP providers simply do not allow clients to do this. SIPPs can also dovetail with business objectives, for example by buying premises to release funds back to the company to help with cashflow or investment. But again, many SIPPs do not allow property purchase and even some of those that do restrict it to standard classes of property.
Of course it makes little sense to pay extra for services or expertise that is never needed, but most Œtrue¹ SIPP providers also offer cost-effective basic SIPPs that are future-proofed because they can be seamlessly switched for more advanced SIPPs without incurring the costs or hassles of transferring providers.
Costs are one of the most complex areas for advisers to grapple with ­ although they should be the most simple. We believe the fairest and most transparent charging structure is a fixed-fee menu approach that shows the exact cost for work done, allowing the costs of administering the SIPP to be separated from the costs of running the investments.
SIPPs that charge on the basis of a percentage of funds under management may superficially look good value but the costs can quickly escalate, as insurance company clients often find when they start to use external funds.
Time-costed fees are questionable in our view, because the client cannot know the exact cost until after the transaction is complete. There may also be either higher fees or outright restrictions when SIPP investors want to use their own trusted specialists ­ such as when they try to use solicitors or lenders in a property purchase but find they must select from the provider¹s own panel where remuneration agreements with the provider are not fully disclosed.
This issue has been highlighted by the rates paid on cash held in SIPPs and the fact that the revenues of some providers are heavily reliant on taking a cut. Clients should, at very modest cost, be able to spread out cash holdings between different deposit takers to secure a higher rate of interest or to maximise protection under the Financial Services Compensation Scheme. But one of the biggest insurance company SIPPs charges both set up fees and annual administration charges that can run into hundreds of pounds, plus transaction charges of £50 a time for what should be a straightforward process.
SIPPs can deliver flexibility and control but the golden rule is not to assume that all of them do. One of the biggest questions advisers should ask themselves when conducting due diligence is who is the biggest beneficiary ­ is it the client, or do they seem mainly to be looking after Number one?

Mary Stewart is a director at Hornbuckle Mitchell