Cash-reliant providers will 'struggle to survive'

Mr Mattison said there were currently about 100 businesses offering Sipps in the UK but about 70 per cent of all plans were set up with just three players – James Hay, Standard Life and AJ Bell.

He said three out of 10 Sipps – or 6000 last year – were therefore arranged by 97 providers and as a result of lesser business volumes many of the smaller businesses were reliant on income from Sipp holders’ cash accounts.

He said: “We get 2000 Sipps a year so I can only assume that a number of these companies are generating a very low level of new business, which cannot continue in the current environment.

“There are now huge costs associated with FSA regulation and generally a squeeze on their income because no one can make money on bank deposits.

“Some were generating 40 per cent of their income from cash held within the Sipp. When the base rate was 5 per cent they paid the client 3 per cent interest and they kept 2 per cent. Now the base rate is 0.5 per cent nobody can make money in this way any more.

“A lot of these companies are simply not going to survive.”

Billy Mackay, marketing director of AJ Bell, said it was niche Sipp providers that would be hardest hit by the dramatic reduction in the base rate in the last few months.

He said niche players were bound to be looking at the fees they levied but could struggle to increase their charges any further as these were already significantly greater than what larger players, like AJ Bell, were demanding.

Mr Mackay said: “Niche providers are more expensive anyway but I am sure they will be looking at ways to increase their margins.

“They will look at different ways to introduce charges and it is difficult to see how successful they will be in doing that.

“Charges are such a difficult thing to nail people down on. People will generally not talk about their plans. We will though, because we have no plans to change our charges.”

Keith Thomson, director of investment services for Dundee-based IFA Blackadders, said Sipp providers who had been “milking” the cash account system would now find their business model at risk.

These providers faced two options - pulling the plug on their business or increasing charges.

He said: “A Sipp provider, for overnight money, should still be able to make at least 0.5 per cent on cash if they are going to give their customers no interest.

“If 0.5 per cent is not enough then that begs the question of just how big a take they were skimming off the top before.

“There will be quite a lot of consolidation. Just as unit trust companies are consolidating their funds at the moment quite a few Sipp providers will find it hard to hold on to their businesses.”

Last month Hornbuckle Mitchell warned Sipp charges could increase as a result of interest rates reaching historically low levels.