Dissatisfaction with traditional insurance company pensions and the introduction of pension simplification, with its the wider investment options and relaxed contribution limits is driving the current boom in Sipps.
Some 150,000 investors are estimated to have already opened a Sipp and the sum of money invested is around £30bn. The demand from investors has led providers to create ever more ingenious investment schemes for their clients, such as hotel rooms via the Freedom Sipp, commercial premises via Winterthur and Suffolk Life and share options via Origen’s Sipp.
With around 120 Sipp providers in the market, the choice has never been greater and new providers are entering the market all the time, although there will likely to be a shake-out in the coming months as the effects of Sipp regulation start to bite.
IFAs are increasingly being called upon to advise on Sipp selection and asset allocation. But with more and more clients expressing an interest in Sipps, it is not just the sophisticated investor who is seeking advice.
Typically clients want advice on which provider to choose, how much to invest, how to invest contributions, asset allocation and above all, the options for converting their Sipp fund into a retirement income.
So here are some of the questions and issues you might want to consider and discuss with a client wanting to invest in a Sipp:
First check whether a Sipp is the best personal pension arrangement for your client. If your client can only make small contributions or does not have a large transfer value to kick start their Sipp or only wants to invest in mutual funds, a personal or stakeholder pension may be more appropriate
RU64 still applies when recommending personal pensions, so you will need to be able to justify recommending a Sipp over a personal or stakeholder pension.
If client is not suited to a Sipp at the moment, it may be appropriate to suggest that they invest in a stakeholder or personal pension now and switch to a Sipp at a later stage.
What type of investment will your client be doing - just stocks and shares and mutual funds, or the entire range of investment opportunities offered by a full Sipp? There is no point in the client paying for services he or she is never going to use.
How often is your client likely to trade within the Sipp?
Will your client want to do commercial property investment?
What rate of interest does the Sipp provider pay on cash balances? This is a highly controversial area because some providers skim a profit. The best providers pay interest of around 0.25-0.50 per cent below base rate, sometimes only above a certain balance size. Hargreaves Lansdowne pays 0.25 per cent below base rate on balances above £7,000. Some providers pay tiered rates of interest according to the size of the cash balance, while Halifax pays a measly 1 per cent on cash balances over £1.
What are the trail commission arrangements on mutual funds for yourself and your client? Some Sipp providers offer discounts on the fund manager’s charges. If the Sipp provider does not, this is effectively a hidden cost to the client.
What are the charges? This is clearly a complex area and much will depend on the level and type of trading your client is planning to do, so it may be worthwhile showing the client the cost of a typical month’s worth of typical trading to illustrate the likely costs per month.
Explain how there may be four or more sets of costs such as establishment fees, an AMC, share dealing charges, unit and investment trust charges, fees for advice, one-off costs for specialist investments such as property purchase and fees to transfer to another pension scheme and to convert the fund into an annuity.
Investors planning to make only small contributions should be steered clear of any fixed initial set-up costs.
For clients with only £50,000-£100,000 to start with and who only want to trade shares and mutual funds, consider online DIY Sipps. There is now a good choice of low cost Sipps from providers such as Sippdeal - the online arm of AJ Bell, Alliance Trust, Cofunds and Fundsnetwork, insurance companies and stockbrokers.
For clients with £150,000-200,000 to invest initially and who do not wish to incur high costs, consider the mid-range Sipp providers (insurers and stockbrokers).
For sophisticated investors with a large amount to invest, consider a full-service Sipp provider, such as Suffolk Life, Origen, Sipp Solutions (Pointon York) and James Hay.
Establish whether your client will want ongoing advice on investment management or only wants a DIY online Sipp. Explain why, even with a DIY Sipp, advice is important in order not to fall foul of the contribution and benefit (LTA) limits.
If your client wants ongoing investment advice, do you want to provide this yourself or refer your client to a third party discretionary fund manager?
What is the administration like of the provider you are recommending to the client? Good administration is clearly crucial, particularly where complex investments are involved.
Discuss with your client the facility to make very large annual contributions using the 100 per cent of earnings rule subject to the cap (£225,000 in 2007-08), the unlimited amounts which can be invested in the year your client takes benefits and the use of ‘input’ periods.
Discuss whether your client wishes to transfer other personal or occupational pensions into their Sipp or to do in-specie transfers of shareholdings. Those nearing retirement may also wish to switch some of their ISA savings into their pension fund in order to give a last minute boost to their fund (and thereby increase the amount of tax free cash they can take).
Explain the lifetime allowance (£1.6m in 2007-08) to the client and the need to keep an eye on this if nearing retirement.
Discuss remuneration arrangements for initial and ongoing advice.
Is the Sipp provider you have chosen regulated by the FSA (mandatory from 6 April 2007)?
If your client already has a Sipp, but this is with a provider who is not regulated, explain why it is essential to move to a regulated provider.
Remember that from 6 April 2007, Sipp investors have a 30 day cooling off period in which they can cancel applications, transfers and income drawdown.
Regulation from 6 April 2007 also means that investors will have the right to take their complaint, if rejected by the provider or yoursself (if the complaint is about advice), to the Financial Ombudsman Service.
If the provider goes bust, the member will have access to the Financial Services Compensation Scheme from 6 April 2007).
Given the complexity of the contribution, lifetime allowance and benefit rules, it should be easy to explain to your client why advice is essential and why taking out a DIY Sipp without advice could be dangerous, as it is easy to fall foul of these regulations.
Last edited March 2007
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