Saying that self-invested personal pensions are more expensive than stakeholders is silly. It is like saying that shopping centres are more expensive than pound stores.
A typical stakeholder pension has a fund range of between 20 and 40 funds. External fund managers usually manage some of the funds on offer, although there are stakeholders where the only funds are in-house ones.
You get a similar starter range of in-house and external funds in a Sipp. But do they cost more when bought through a Sipp?
I can only speak for my own company’s Sipp here (which, incidentally, was one of the lowest cost Sipp identified in a recent survey). For typical investments (£50,000-plus), Standard Life has more than 30 in-house and external funds available at only 0.7 per cent annual management charge. This is the price of these funds before any sales cost is added – what you might call ‘factory gate prices’. For this starter range of funds, there are no other charges, no fixed set-up fee, no fixed annual charge. The only charge is the single AMC, the same as with stakeholder pensions.
Typical fees (3 per cent up front plus 0.3 per cent fund-based trail), takes the charge up to 1.6 per cent for the first six years and 1 per cent thereafter.
When it comes to stakeholder pensions, four of the top five sellers are commission-paying schemes. Unsurprisingly, they all make full use of the 1.5 per cent charge cap during the first 10 years, falling to 1 per cent thereafter.
Which is the cheaper of these two charging structures? At first glance, they appear broadly similar – in fact, almost identical. And that is because they are. When you treat a Sipp like a stakeholder, it behaves just like a stakeholder, and it costs roughly the same as a stakeholder. But when you want something more than you would get from a stakeholder, then you pay more.
That is the beauty of Sipps; they are whatever you want them to be. I think that some people have a problem grasping this concept. Some say that a Sipp can only be a Sipp if it is a ‘true Sipp’. What they mean is that unless a Sipp invests directly in cash, commercial property and shares then it must be an insurance company hybrid.
Others seem to have a need to put a separate label on each of the variants: stakeholder, personal pension and ‘true’ SIPP. They need every pension to have its own box.
What should the defining characteristics of a Sipp be? Within reason, it should offer the full range of investments permitted by law. There are exceptions to this rule, such as connected shares, which are impossible to administer. Exceptions should be rare.
And there should be no minimum investment required into the inhouse funds of the Sipp administrator. What is the point of selecting an option that is supposed to give you freedom, when someone tells you where you must invest?
Going to a shopping centre can be as cheap as going to a pound store if the only shop that you visit in the shopping centre is the pound store. However, the range of goods that you can get in the pound store is somewhat limited. At some point, shopping in the pound store will become an unsatisfying experience. You will eventually feel the need for something more.
That is why shopping centres have become popular – you can still go to the pound store if you want, but everything else is available in the same place should you feel the need.
John Lawson is head of pensions policy at Standard Life