The Self-Invested Personal Pension market has seen an unprecedented year of change, and we still have two months to go!
Three key themes have emerged over the past 10 months; consolidation, charges and clarity.
Not all the changes have been positive for consumers, with prices rising and competition falling. Let’s look at all three in more detail.
Consolidation – on the rise
The year started with Curtis Banks acquiring Suffolk Life in one of the largest ever deals of its type.
The pace of consolidation hasn’t slowed down since then: Hornbuckle bought Rowanmoor, Talbot & Muir acquired Attivo and Mattioli Woods took over the troubled Stadia.
The mergers and acquisitions have been largely driven by three factors. Firstly, the FCA’s decision to change the way the amount of capital SIPP providers need to hold is calculated; more of that in a moment. Secondly, a recognition that the business models of many providers are flawed. Thirdly, distressed SIPP providers who have taken on significant levels of toxic assets and have been forced by the regulator to cease trading.
This naturally leads to one question; how will it affect SIPP investors?
On one hand, it could be unwelcome news; consolidation means fewer SIPP providers and less competition, which could push up fees and curtail choice.
However, if the resulting group of remaining SIPP providers is stronger and financially more secure, surely this must be a good thing for investors?
Charges – on the rise
2017 has seen many providers increase their charges, citing the financial burden of new regulations.
All SIPP providers are forced to keep aside a certain amount of capital (cash), to aid the transfer of assets to a new home, should they run into financial difficulty. The calculation used to assess the capital required has recently changed and now takes into account a range of factors, including the types of assets held.
Assets are now divided into ‘standard’ and ‘non-standard’; with providers forced to increase their capital reserves where they hold a greater proportion of ‘non-standard’ assets.
Many SIPP providers have passed this increased ‘cost’ on to investors through higher fees.
These new rules have had a further, probably unintended, consequence. Fixed term savings accounts, even those covered by the Financial Services Compensation Scheme (FSCS) are now catagorised as ‘non-standard’. As a result, many SIPP providers have increased their fees for SIPP savers holding such accounts, or restricted access to them.
The recent increase in fees, makes it more important than ever that investors check exactly what they are paying and how this is eating into their returns.
Clarity – in a state of flux
Clarity and simplicity are two admirable objectives, but so hard to achieve in the SIPP world.
However, new rules will see providers forced to declare the amount of interest they retain, which would have otherwise been paid to SIPP investors.
SIPP providers keeping your money? Allow us to explain.
All SIPPs have a current account, which receives income and contributions, makes investments and pays fees. The bank providing the current account pays interest; a lot less than it used to, but that’s a different story! However, some providers retain a proportion of this interest for themselves, rather than passing it all on to the SIPP investors.
Many SIPP providers argue that this is a fair practice, which helps to keep SIPP fees low. Furthermore, some suggest that the investor doesn’t lose out, as bargaining power of the SIPP provider leads to a higher rate of interest, than would otherwise be available to an individual SIPP investor.
Others, including ourselves, are not convinced that this retention of interest helps to keep fees low. We also believe that SIPP providers should be more transparent and retain none of the interest received.
The first step to this objective is greater clarity, we therefore welcome new rules which will force SIPP providers to declare the interest they take in far clearer terms.
Just as one area gets simpler, another becomes more complex.
For years, a minority of investors have transferred assets into their SIPP in lieu of making cash contributions. These are known as in-specie contributions and whilst rare, were a useful option in certain circumstances, particularly if is reduced the costs associated with the sale and repurchase of an asset.
However, HMRC is now looking more closely at the validity of in-specie contributions and as a result many SIPP providers have stopped accepting them. Worryingly, there is also speculation that HMRC may look to retrospectively unwind some in-specie contributions.
What does 2017 hold?
We expect the rise in fees seen in 2016 to slow down, largely because the effect of the new capital adequacy rules will have washed through the system. However, if interest rates fall further, some providers who are reliant on bank interest to help cover overheads, may need to increase charges yet further.
Furthermore, although it may slow down, we must expect the consolidation in the sector to continue.
Will we get more clarity? That’s probably the hardest question to answer.
The new capital adequacy rules have shown that even well intended rule changes can have a negative affect; especially if you hold deposit accounts in your SIPP. Furthermore, SIPPs are an inherently more complex option; it always has been hard to compare the charges made by different SIPP providers. We don’t expect this to change, and in many ways, nor should it; the day when SIPP providers all charge in similar ways will be a bad one for the consumer.
Here to help
If your SIPP provider has been taken over, or pushed up fees, in 2016 we are here to help.
Sarah and Bev are experienced in advising SIPP investors and, as you will see from our website, it is one of our key areas of expertise.
Call us on 0115 933 8433 or email, email@example.com and let’s have a chat.