We’ve been updating SIPP Zone over the past few weeks, which gives information on charges and allowable investments for most SIPPs currently available, and we’ve noticed a couple of interesting trends.
Firstly, on the back of new regulatory capital requirements (the amount of cash they have in the bank to you and us!) some SIPP providers have become more restrictive in the types of investment they will allow.
Secondly, many providers are changing their fee structures and now fit broadly into one of three categories:
- Fixed fees
- Time-costed fees
- Percentage based fees
So which is right for you and your SIPP? We’ve analysed the options.
This is the structure run by the majority of SIPP providers, although the exact models range from the beautifully simple to the horrendously complex.
At the simpler end we have the likes of InvestAcc’s Lite, Minerva and Flexi SIPPs as well as Liberty’s Option SIPP, all of which have charging structures you could almost get on the back of a postage stamp.
At the other end there are SIPP providers who charge for every possible event, even death! We’ll save their blushes and not name them here, but a few minutes spent on SIPP Zone will be plenty of time to identify the culprits.
Don’t misunderstand us, a SIPP provider needs to make a profit, in fact it makes for a more stable environment if they do. But, we fail to see why some SIPP providers have to make life so complicated!
Who might fixed fees be right for?
- As a rule of thumb the larger your pension pot the more cost effective fixed fees are
- You also benefit from knowing exactly the fees you will pay
- If your SIPP provider is less than efficient it isn’t you footing the bill
- Fixed fees make it easier to compare the charges of one SIPP provider to another
- Where there are multiple and regular transactions, for example when a range of deposit accounts are used, and the provider charges one annual fixed fee to cover all transactions
There are of course downsides to fixed fees, especially for those people with smaller pension pots and where multiple transactions attract individual fixed fees. Furthermore, if your SIPP provider gets their numbers wrong and has to push up fees transferring to an alternative provider could be costly, especially if you are a property investor.
Whilst there are only a handful of SIPP providers who work on a purely time-costed basis, there are a number who mix fixed fees with time-costed work for more complex transaction such as property purchase.
This method of charging works simply by a SIPP provider publishing the hourly rates for their staff and charging your SIPP accordingly for the number of hours spent on a particular job.
In our experience time-costed work can have some significant downsides:
- It tends to be more expensive than a fixed fee arrangement
- If the job over runs, or the work is more complex, the SIPP will be hit with the cost of the additional time spent, this is not the case with fixed fees
- As SIPP providers who charge in this way will generally only give an estimate of the time it will take to complete a job, it can be hard to compare the costs of different providers
- If your SIPP provider refuses to cap their fee your commitment is open-ended
- The fear of building up ever greater fees can put some members off communicating with their SIPP provider
Of course, there are occasions when time-costed work can be beneficial:
- Compared to some of the more expensive fixed fee SIPPs, as well as those which charge a percentage of the amount invested, a time-costed fee may actually be cheaper
- You will only pay for the work done
Percentage based fees
This type of charging structure tends to be used by SIPPs which run a ‘platform’ style model, allowing access to Unit Trusts and OEICs as well as directly held assets such as stocks and shares, corporate bonds and gilts.
There are also a handful of SIPP providers who charge percentage based fees for property redevelopment and refurbishment.
So when can percentage based fees be the right option?
- For smaller pension pots, where a fixed or time-costed fee would represent an unreasonable percentage of the fund
- Where it is important to know approximately how much will be charged each year
- Where there are numerous transactions and a fixed or time-costed fee, for each, would be expensive
However, for larger pension pots a percentage based fee could become very expensive, especially compared to a fixed fee alternative.
“How do I compare the alternatives?”
Whilst SIPP Zone will show you the fees for most SIPP providers comparing one with another is not an easy task and will take you or your Independent Financial Adviser (IFA) some considerable time.
It’s important to think about your current requirements, as well as those in the future. For example, if your circumstances will change over the next few years, perhaps because you plan to retire or make a complex transaction, the additional costs should be factored in. Think about exit costs too, if you make the wrong decision, the transfer out charges of some SIPP providers can be eye-wateringly expensive.
There is no doubt though that it’s worth investing the time or money towards your IFAs fees though, making the wrong decision could be a costly mistake!
We’re here to help
If you would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email email@example.com