Not so long ago, to compare the relative merits of Sipps and stakeholder would be like arguing over which would win in a fight between a polar bear and a crocodile – it is intellectually stimulating if you are drunk but otherwise fairly pointless because they live in totally different worlds (besides, the crocodile is bound to win because it can disguise itself as a pair of cowboy boots and matching handbag).
Not so any more. Now it is hard to tell where Sipp territory stops and stakeholder begins. The conventional argument has always been that Sipps are very expensive but an absolute whizz if you want to do something clever with your pension fund, such as buying a bordello in Grimsby. Conventional wisdom always decreed that Sipps only worked if you had a fund of £50,000 or more because the fixed costs were so high that anything less would struggle to deliver worthwhile performance.
By contrast, stakeholder has generally been thought to be about as exciting as watching Scotland play rugby (or football, come to think of it) but cheap.
But now you can get a Sipp with no fees and fund management costs which barely exceed 1 per cent. This means that the traditional gulf which existed between stakeholder at one end of the buying spectrum and Sipps at the other is no longer relevant. It is as if the crocodile has discovered Easyjet and decided to go skiing.
This change has come about because of reduced administration costs and improved technology. These changes have resulted in a new breed of Sipp providers such as Hargreaves Lansdown and Sippdeal. These new Sipps are simple to use, focused on investment freedom and designed for any investor who wants a little more from their investments than a stakeholder balanced managed fund which is specifically designed to be no better than average.
Our own research at Hargreaves Lansdown bears out the intuitive conclusion that it is possible for investors to get the best of both worlds by combining a low-cost Sipp with some good quality fund selection. To explore this issue, we compared the performance of a basket of stakeholder default funds over the past two-and-a-half years with the unit trust funds which our clients were buying back in April 2001.
Over all the time periods we looked at, the unit trust funds were clear winners. The unit trusts' performance more than outweighed the slight additional annual management charge and investors who bought those funds are substantially better off than if they had bought a stakeholder.
I recognise that stakeholder will continue to be the right answer for many consumers for a long time to come. It may be cheap and occasionally bland but it is accessible and 350,000 employers have designated one for their employees. By contrast, Sipps will continue to be the upmarket solution for many high-net-worth clients. But there is also a growing middle market of investors who have the courage and skill to undertake some investment research for themselves or who have the benefit of a skilled IFA who can make the investment decisions for them. For these people, often with only a few thousand pounds in their pension or with only a relatively modest sum to save each month (our minimum premium is now just £100 a month), a Sipp is now a perfectly sensible alternative to stakeholder.
This is further reinforced by the quality of investment research and fund recommendations which are readily available in the public domain.
The buying decision is simply down to what type of investor you are. For many, stakeholder will continue to be the right answer. For those who are prepared to invest a little time in researching and reviewing their pension, a Sipp presents a realistic alternative at a price which is only marginally above that of stakeholder.
Tom McPhail is head of pensions research at Hargreaves Lansdown