A question of charges and rebates

September Retirement Strategy

The thorny question of charges has raised its head again, with figures from Alliance Trust Savings that purport to show that customers can increase their retirement income by many thousands of pounds by switching to a Sipp provider that rebates commission back into the fund.

Alliance Trust says investors who use its iSelect Sipp to invest a £50,000 transfer could increase their tax-free cash lump-sum entitlement by £7,775 over a 25-year term while their total pension pot could be worth £31,000 more at retirement compared with an investment with a competitor who does not pass on commission.

Critics say, however, that while charges and rebates are, of course, important in arriving at the final outcome of an investment, clients should not be swayed by the charging structure alone when choosing a Sipp provider.

Sipp fees have in any case been falling over the past three years, some by as much as 11 per cent.

Research by analyst Defaqto says the combined average set-up and annual admin fees for a £50,000 investment have fallen from £675.41 to £600.11.

Concept Financial Planning managing director Paul Richardson says: “The most important decision for clients when considering a Sipp is not really the cost. Most important is what type of assets they want to hold in the pension plan. There is no point paying Sipp charges and holding insured funds that are available thr-ough a ’normal’ pension plan. If a Sipp is to be used properly, the use of insured funds will probably be minimal.”

Hargreaves Lansdown pensions analyst Laith Khalaf says: “Focusing on costs to the exclusion of all else is a flawed strategy. What investors need is a suitable product which offers them good value for the information and services they will get.” However, he is quick to point out that it is only if a client is travelling “off piste” that it is necessary to pay for specialist service.

’Focusing on costs to the exclusion of all else is flawed. Investors need a product which offers them good value for the services they get’

He says: “I do not see the point in paying high Sipp charges unless you are looking at investing in fairly esoteric investments such as directly into commercial property. If you are going to stick to funds and shares, then you might as well keep costs down by investing in a low-cost plan.”

’Focusing on costs to the exclusion of all else is flawed. Investors need a product which offers them good value for the services they get’down’sVantage Sipp falls into this category, as do Sipp-deal, James Hay e-Sipp and Alliance Trust’s Sipp.

Richardson, however, questions how many people would self-invest without any advice at all, which is what the Alliance figures suggest.
He also queries how many people would hold a Sipp for 25 years - the timespan used by Alliance Trust for its figures. He says: “Most people would probably work up to owning a Sipp when economies of scale allow and then move to drawdown or purchase an annuity which must involve charges.”

Steve Rees, financial services operations director at financial services group CBG, says: “Investment fund charges can be brought down by utilising asset allocation models and passively managed funds. Some providers already insist that charges are rebated to the member and that advisers agree the commission or fee they receive with the client in writing. This can give a much greater saving than the 0.5 per cent payable to the financial adviser, where there is no rebating. It is then a question of agreeing a suitable fee with the adviser to sufficiently compensate his time while not making the Sipp too expensive for the member.”

Khalaf believes more advisers will be looking at schemes that do not pay commission and rebate charges. He says: “With advisers switching to offering fee-based advice in time for RDR, we might see more of them considering such products.”

Alliance Trust Savings head of pensions Steve Latto says: “With the Government introducing increases in the minimum state pension age earlier than expected and the economic climate making it more diffi-cult for many people to make further pension contributions, it is vital that customers make the best choices when choosing a pension provider.”

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