Pensions Freedom, coupled with new legislation from the Financial Conduct Authority (FCA) regarding the amount of capital needed to be held by SIPP providers, mean the landscape of the self-invested market is changing.
Whether your are a new or existing SIPP investor choosing the right provider is crucial, not least because a combination of exit fees, set up charges and advice fees can make moving SIPP provider an expensive business.
It’s certainly one decision you are better to get right first time around.
So how do you know you are choosing the right SIPP provider? Things have changes so much since we last wrote about this subject we thought it was time for an update.
1. Look for a profitable provider
A profitable SIPP provider, with a strong balance sheet, means they are less likely (although this isn’t of course guaranteed) to put up fees in the future.
Furthermore, a profitable provider will be better placed to meet the new FCA capital adequacy requirements, again without having to increase fees.
Finally, profits means the provider is more likely reinvest in new services for the benefit SIPP members.
2. Will you still be able to invest how you choose?
SIPP providers are still coming to terms with the FCA’s new capital adequacy requirements.
In a nutshell the new rules mean providers who hold more ‘non-standard’ assets, will have to keep aside a larger amount of capital. Those providers who hold fewer ‘non-standard’ investments, or even none at all, will have to hold significantly lower regulatory capital.
But how does this affect you?
In two main ways. Firstly SIPP providers could decide to increase their charges to cover the extra capital needed. Secondly they could decide to ban investment into ‘non-standard’ assets, even if they previously allowed such investments to be held.
Before you commit to a SIPP provider, make sure that the investments you plan to hold are accepted by the SIPP provider both now and will continue to be in the future.
3. How much exposure is there to unregulated investments?
Over the past few years some SIPP providers have allowed their members to invest in unregulated assets, such as overseas property, land, forestry, we’ve even seen people invest in car parks and grave yards!
Many of these investments have turned sour with investors losing money. Attention is naturally turning to the SIPP providers with investors asking why, as trustees, they allowed these investments to be made.
Some investors have made successful complaints against their SIPP provider, resulting in compensation being paid and as a result at least one SIPP provider has stopped trading.
Before you select your SIPP provider, try and find out how much exposure they have to toxic and unregulated investments; the last thing you need is for charges to increase to cover compensation payments or even worse, the SIPP provider going bust, forcing you to move again.
4. Will the SIPP provider allow you preferred method of investing?
Many SIPP investors believe that the most important criteria for choosing the right SIPP is charges; it isn’t, there are far more important things to consider.
We’ve already mentioned three, but before you get to cost you should also make sure that the SIPP provider will allow you to invest how you wish.
After all, where’s the sense in choosing a cheap SIPP provider, if they won’t allow you to invest how you wish?
Before you make your decision you should ensure that the SIPP provider will allow you to hold the investments you wish to make, that they have no plans to change their criteria and they will facilitate trades via your preferred method e.g. online, phone, via an adviser or execution only.
5. What are the charges?
There are four main things which affect how much your pension pot will be worth in the future:
- How much you pay in
- The return you get on your investments
- The length of time you invest for
- The charges you pay
SIPP providers charge in a range of different ways:
- Fixed fees
- Time costed fees
- Percentage based fees
- A combination of the above
Comparing the charges of SIPP providers can be extremely difficult, but it’s important to spend time in it to ensure you choose a provider which offers value for money, whilst meeting the other criteria we have laid out.
When comparing SIPPs, which of course we would be very happy to help you with, it’s important to make sure you take into account your current situation, but also the future. For example, you might be a cash investor now but plan to buy a property in the future, alternatively you could still be contributing to your pension but plan to retire in five years and use Income Drawdown to turn your pot into an income.
In both circumstances the SIPP provider might make additional charges, which you need to be aware about at the start. Indeed some providers won’t even allow you to buy a property!
Making your decision with one eye on the future could save you significant exit, entry charges and advice fees in the future.
6. Are they fair on cash?
Every SIPP has a ‘current account’ which is used to receive contributions and maturities, as well as a safe place to hold cash until investments are made.
Most SIPP providers get an interest rate of between 0.75% and 1% on the SIPP ‘current account’ but very few pass this on in full to the member; holding back a slice of the interest as windfall for themselves.
We believe this is wrong, especially when SIPPs can open deposit accounts elsewhere and allow the member to receive the full amount of interest
Secondly, will your SIPP provider allow you unrestricted access to ‘sippable’ deposit accounts? There are a number of deposit accounts specifically designed for SIPPs, but not every SIPP provider will allow unrestricted access, with some working on a small panel or not allowing any additional accounts at all.
If your SIPP provider will allow you to open additional deposit accounts you should also check their charges are reasonable and don’t wipe out the extra interest you will make.
We’re here to help
Our advisers are highly experienced in recommending the right SIPP for our clients.
If you are considering a new SIPP or transferring from your existing provider, we’re here to help.
Call us on 0115 933 8433 to speak to an adviser or email firstname.lastname@example.org