Choosing the right SIPP isn’t an easy task, the number of options is frankly bewildering, even to seasoned investors or advisers.
So where should you start?
The answer to that question is all too often: “with charges” or “with the cheapest SIPP”.
Both are wrong.
Of course, we all like getting value for money, but it isn’t the most important thing when choosing a SIPP. To be honest, it isn’t even in the top five things you should be considering.
So what are? Read on and we’ll tell you.
1. Suitable investment choice
In our experience most SIPP investors know the types of investment they want to make; shares, property, deposit accounts and so on.
The starting point for selecting any SIPP is that it will allow you to hold your preferred type of investment. For example, if you want to use deposit accounts, selecting a SIPP, because it is cheap, but which won’t allow you to hold third party accounts or will restrict your access, makes no sense.
The first stage in narrowing down the SIPP universe is to exclude all providers which won’t allow you to make your preferred investments.
2. Financial stability
The financial strength and stability of a SIPP provider might not be the most obvious factor to include in your list of criteria, but it is vitally important.
A loss making SIPP provider might be tempted to increase fees, be forced to cut back on service or fail to invest sufficiently in their infrastructure. All things which could negatively impact you and your pension.
It is also possible that a financially insecure SIPP provider could be taken over, which may lead to changes or fee increases.
Finally, all SIPP providers need to keep a certain amount of capital aside to allow an orderly wind down or transfer of business in the event that they go bust. Does your chosen SIPP provider meet these rules? Perhaps more importantly, do they run a healthy business, which is less at risk of going bust in the first place?
Poor service can be hugely frustrating as an investor, especially if you are keen to move quickly to buy or sell investments or undertake a potentially complex transaction such as a property purchase.
It is reasonable to assume that your financial adviser will only recommend a SIPP provider which he or she has used before and offers acceptable levels of service.
However, it’s harder if you are not using a financial adviser and are therefore an ‘execution only’ or ‘direct’ investor. An online search might bring up some revealing results, Trust Pilot can also be useful and of course here at Investment Sense we run SIPP Chat.
The subject of service is also closely linked to exit fees.
If the service you receive is unacceptable, how much will it cost you to transfer away to a different company? All SIPP providers charge an exit fee, but it makes sense to know how much you will be charged (accepting of course this could always be changed) if the service you receive is poor and you decide to move to a competitor.
4. Use of technology
More and more of us want to manage our financial affairs online, but not all SIPP providers have caught up.
Make sure that the online functionality meets your needs, if in doubt, ask for a demonstration.
There’s nothing more frustrating than finding yourself stuck with a SIPP provider which won’t allow you to run your pension how you want to. Which of course leads back to exit fees and the cost of transferring away.
5. Hidden fees
Once you have narrowed down the wider market to a far shorter list, you can consider fees and whether you believe they represent value for money.
Starting the other way around, with fees, could mean you end up with a SIPP which:
- Won’t allow you to invest in your preferred choice of asset
- Is financially weak and therefore needs to put up fees
- Offers poor service, with unacceptable administrative delays
- Doesn’t put technology at the heart of it’s offering and therefore so poorly administratively
- Isn’t committed to the market and is therefore considering a sale, which could lead to a change in your SIPP provider, instability and potentially rising fees
Don’t just look at headline costs either:
- Consider whether a SIPP provider who charges percentage based or fixed fees is a better option. As a rule of thumb percentage based fees are better for smaller pension pots, whereas fixed fees are often more economical for larger funds. Do the maths though to calculate which is the most economical; having followed the first four steps beforehand though!
- Remember to take into account the cost of transferring away in the future and consider too other changes to your circumstances which may see fees change. The most common instance of that is retirement; fees might be reasonable whilst you are still building up your pension, but may rise when you retire to an uncompetitive level
- Look for hidden costs. Naturally these aren’t easy to find, but they could cut into your returns. For example, we recently heard of one SIPP provider who charged clients £95 to send a simple letter updating members on regulatory changes. The letter was unsolicited, untargeted and really should have been covered by the annual charges paid by members
We are here to help
Choosing the right SIPP isn’t easy, the temptation is to start with fees, but there are many things which are more important.
We are here to help, if you would like to know more about how we select the right SIPP for our clients call us on 0115 933 8433 or email firstname.lastname@example.org