The market is awash with DIY penion wrappers promising
greater flexibility and functionality, albeit at a cost. Faith Glasgow explores
whether it's really worth paying more for bells and whistles.
Looking for a personal pension? Confused about the plethora
of choices on offer and how they really differ from each other?
Unsure whether you need the 'added functionality' of a
self-invested personal pension (SIPP), rather than a straightforward personal
pension product?
It's hardly surprising.
What is a Sipp Pension?
Sipp have been around for more than 20
years now, and for much of that time, according to Tom McPhail, head of
pensions research at Hargreaves Lansdown, there was "clear blue water
between the wide range of investments on offer through a SIPP wrapper, and the
restricted range of largely in-house funds available from the personal pensions
provided by insurance companies".
There was a marked difference in the pricing of the two
types of pension too. "SIPPs were designed specifically for high-net-worth
individuals, often businesspeople wanting to hold individual equities and
commercial property in their pensions, and they involved lots of fees,"
McPhail adds.
But the market has changed dramatically in recent years. At
the bottom end, insurance companies have been expanding and making their
traditional personal pension fund ranges more 'flexible'.
A growing number, including Scottish Widows, Standard Life
and Aegon, also now offer their own products badged as SIPPs.
Some comprise a wide range of investment funds (1,000 to
2,000) available via a fund supermarket, supplemented by a few added extras -
an external cash account, a sharedealing facility, in some cases a panel of
discretionary fund managers who'll run your portfolio for you if required.
Others are muscling in on top-end 'full SIPP' territory:
Legal & General bought property-specialist SIPP provider Suffolk Life two
years ago, while Standard Life is building up its own property capabilities.
Meanwhile, established SIPP providers such as James Hay and
AJ Bell have expanded 'downmarket' to cater for demand from those investors
wanting control and flexibility over their own pension portfolios, but not
interested in the complexity or high costs of commercial property, structured
products, hedge funds or other relatively sophisticated investments.
Related Post:
What is a SIPP? SIPP Review
The result is a broad and complex spectrum of mainstream
personal pension products, some labelled as SIPPs and others as personal
pensions.
What's right for you?
At James Hay, business development director Richard Mattison
argues that only fully comprehensive products merit the SIPP label.
"The term SIPP is not appropriate for low-cost
products, because they don't allow access to every type of asset permitted in a
pension by HM Revenue & Customs," he explains. But as things currently
stand, it may crop up attached to a wide variety of pension products.
So how should pension investors decide what's most
appropriate for them? The two central issues are asset choice and cost.
At the top of the spectrum, full-service SIPPs allow
investment through assets traded on any recognised stock exchange worldwide, as
well as structured products, derivatives, hedge funds and, most significantly,
commercial property.
They may also allow more esoteric assets, such as traded
endowments and gold bullion.
Commercial property is a popular option for business owners,
who are able to buy and hold their own premises very tax efficiently within
their pension.
Tax relief on pension contributions helps boost the capital
available to purchase the property, and it's also possible to borrow up to 50%
of the pension fund value to invest.
Once the property is held within the pension fund, rent is
paid to the pension free of tax, and if it is sold within the pension scheme,
the proceeds are not liable tocapital gains tax.
But full SIPPs come at a price: expect a set-up fee of £300
or £400 and annual charges of around £800, as well as various additional SIPP
expenses connected with the purchase and ownership of commercial property.
As Patrick Connolly, head of communications at AWD Chase de
Vere, emphasises: "There is little point in paying these extra charges if
you are not intending to use the extra functionality."
For competent investors interested in selecting, monitoring
and managing their own portfolios but content to stick with relatively
mainstream investments, there is a wide range of much cheaper
online/phone-based 'fund-based' SIPPs offering a broad choice via a fund
supermarket, supplemented in many cases by other investments such as shares.
It's worth finding a provider catering not only for your
current investment preferences but also for the possibility that in years to
come you might decide to branch out into other investments.
The choice offered within a low-cost pension labelled as a
SIPP can vary considerably, so you need to do some homework or take
professional advice.
The simpler option
But investors who don't need or want such a vast choice of
funds and are not bothered about actively managing their fund portfolio – who
basically just want to tuck a regular contribution away into some decent funds
each month – may be better off setting up a personal pension from an insurance
company offering a more limited range (often known as a hybrid SIPP).
Moreover, there may be potential to increase flexibility in
years to come, as some of these personal pension schemes have a SIPP capability
involving more choice if you want it.
Charges are the other key consideration, though it can be
hard to make direct comparisons. "Personal pension charges have typically
been bundled, with a single annual management charge of up to 1.5%, but the
components – wrapper, funds, advice – are increasingly being unwrapped and
charged separately in the interests of transparency," explains McPhail.
SIPPs don't bundle their charges so it's a matter of adding
up any set-up, dealing, administration and underlying fund costs. But for
fund-only investors, low-cost SIPP products may work out as cheap or cheaper.
For instance, on SIPPdeal, Hargreaves Lansdown and James
Hay's E-SIPP there's currently no set-up or annual wrap charge for fund
investors, so the only costs are the annual management charges of the funds
themselves (which vary considerably).
You may pay additional annual administration charges if you
want to invest in direct equities – for instance, Hargreaves Lansdown charges
0.5% of the value of the share portfolio, capped at £200; but again there's no
annual charge from SIPPdeal.
Clearly, at the fund-oriented end of the personal pension
spectrum, it's not so easy to make direct comparisons. A specialist IFA will be
able to help: many now use low-cost "wrap platforms' such as Transact for
their clients, which give access to a full range of funds, shares and exchange
traded funds.
"Even with professional advice fees on top, the total
costs will usually be lower than the 1.5% personal pension alternative, for
much greater flexibility and choice,' concludes Alan Smith, chief executive of
Capital Asset Management.