All the rage

Mintel has given MM exclusive access to SIPPs research, due to be released in December, which helps to assess the scale of this shift by looking at consumer views on the product. It surveyed more than 750 people aged 21 or above with £50,000 in a salary or £50,000 to invest and found that 4% have a SIPP, while a further 4% are considering investing in one. This is a rise on the figures released in December 2010, where 3% of those with £50,000+ had a SIPP.

The research also highlights the type of people that have SIPPs, split into 6% of the males questioned in the survey and 2% of females. Predominantly the research shows that SIPP holders have a family, live either in London and the south east or Yorkshire and earn £50,000 pa or more.

However, the effect of the emergence of lite SIPPs – pared down SIPPs that come at a lower cost, do not offer full investment options and are aimed more at the mass market – is shown as 6% of those earning £39,999 or less have a SIPP. Obviously, salary is not the only indicator of wealth, but it shows that the product is popular with some people who may not have large ongoing wealth.

Mintel research from the previous year also shows just how big the SIPPs market is, with the schemes now being the largest segment within the overall single contribution individual pensions market in terms of value, despite stakeholder pensions outselling them by three to one.

Getting the basics

This survey is Money Management’s biggest yet, with 84 plans represented, compared to 61 last year. While partly this is due to more providers being willing to participate, it is also a sign of a growing market. Some SIPP providers are very small, as we will later see, meaning that the market is split between the main 10 or so providers and then far smaller ones.

The difference between so called full and lite SIPPs can be seen from the minimum investment figures. A large number have no minimum investment. A few providers separate themselves from this mix, namely Rathbones, which requires a minimum investment of £50,000, and Friends Life, which needs a £50,000 initial sum to be a mix of the fund and five times the annual contribution.

Online access is an increasing demand from consumers, with the rise in popularity of online banking and use of smartphones meaning that people expect to be able to access their funds easily and regularly. While more providers, 52, offer online valuations this year, more have taken part. The percentage offering these services has actually dropped, from 64% to 61%. This may be due to the increased number of smaller providers in the survey, which do not have the technical or financial backing to provide these valuations.

While the number of providers has increased in the survey, there are expectations of a decline by this time next year, as widespread consolidation is anticipated in the sector. Currently the market is estimated at around 190 providers, with many having emerged to exploit the boom in SIPP new business in recent years. However, many view this as far too many, making consolidation inevitable.

Nathan Bridgeman, director of pension consultancy at Talbot and Muir, thinks that takeovers are on the cards in the coming year, with the FSA likely to encourage this to make the market far more manageable to regulate.

This consolidation has been predicted for some time and this year has only seen small movements in this direction, such as Pointon York’s Bridgewater Pension Trustees and Halcyon Financial Services and Curtis Banks’ buying of Montpelier.

However, many feel that new capital adequacy requirements and regulatory change will squeeze a number of the smaller providers out of the market. With increased capital adequacy, accompanied by standard costs of administrative and technical expertise, many feel that it will simply not be possible for small providers to compete.

Bridgeman adds, “Capital adequacy is going to be a major catalyst for this consolidation as those SIPP providers that are not cash rich will suffer under the growing burden of compliance and a squeeze on profit margins.”

Ross Millar, marketing executive at Hornbuckle Mitchell, adds that takeovers are not always a good thing for clients. “The risk for advisers and their clients is that service standards fall or attitudes to certain investment types change as a result of consolidation,” he adds.

Market movement

As with last year, Standard Life is the biggest provider when determined by total value of in force business, having £15.8bn. This is very closely followed by Aegon’s total value, between its three plans, of £14.2bn. This is a substantial rising up the ranks for Aegon, which stood in third place this time last year and only had £9.4m. In particular it is a drop for third place James Hay, which has £11.7bn in total value. James Hay has been a big player in recent years and its acquisition by IFG Group was expected to put their combined value above Standard Life’s.

AJ Bell comes in next, at £10.0bn, after which there is a sizeable drop down to the fifth largest book of business from Hargreaves Lansdowne, with £5.8bn. While Hornbuckle Mitchell’s figure last year was an approximation, of around £2bn, it appears to have had a storming year, now having a total value of £4.1bn. However, Miller explains that the previous figure was due to compliance only allowing a calculation up to £2bn, while this year has seen a more accurate representation of the figures. So the rise is due to changes in business process rather than an influx of new money.

The total value in force has also increased, as would be expected with more participants in the survey, from £63.1bn to £83.4bn, which represents a 32% rise. However, the average SIPP value has also increased, from £111,926 in 2010’s survey, to £195,524 this year, so rising by 75%. This shows the real growth that is occurring in the market, on which many providers are capitalising.

The Mintel research mentioned earlier also shows the potential for growth in the market, as more than half of those questioned had heard of SIPPs – surprising considering that they are still a relatively niche financial product. This niche place in the market is starkly shown by the fact that compared to the 4% that have SIPPs, 58% of respondents have a company or occupational pension, while 23% have a personal or stakeholder pension, with 15% having no pension at all.

The only figure that has dropped is the number of properties in the portfolios, reducing from 15,247 to 14,707. This marginal drop likely represents the slow property market at the moment, which is deterring buyers. That said, the average value of property has risen by 8%, highlighting the pickup in property prices in the past year alongside the increased size of these funds, meaning that there is cash to buy into the market.

Pricing it up

As fees can be split in so many different ways it is hard to compare the providers and plans. Research from Defaqto shows that the average setup fee has decreased by 27% between 2006 and May 2011 to £223.88 and, while annual fees have not dropped at the same rate, there is downwards pressure on them. This highlights the pressure on providers and some believe that this will be a catalyst for consolidation in the market, as mentioned earlier. With smaller providers having to keep up with the pricing of large firms that have economy of scale, it seems impossible that some will not fall by the wayside.

However, many commentators expect the fees to rise as margins are pinched. Typically SIPP providers take a margin on bank account interest rates, but with rates being so low at the moment revenues from this have dwindled. In addition, the FSA’s CP 11/3 paper has hinted that it may ask SIPP providers to state the margins that they take, in a bid for transparency.

Many offer a free initial fee, to draw in new customers, but these providers may end up being the most expensive in the long run as they charge a higher annual fee or for transactions. One example, which is by no means the only one, is Xafinity. It charges nothing initially and 0.24% of the fund annually, to a maximum of £515, so comes far below other providers. However, on top of this is 0.25% of any unit trust and insurance company investments, an annual and setup fee for a discretionary find manager account and a £400 charge if the SIPP is closed. If regular new investments are made the zero initial charge starts to look very costly.

This compares to the likes of AWD Chase de Vere, which charges £475 setup and £445 pa but then no investment charges. Curtis Banks has a low cost proposition, with £200 initial, £345 pa and zero transaction costs, in addition to relatively low vesting and transfer costs.

However, these charges can only really be judged on an individual level, depending on what the SIPP is needed for. For example, someone who trades rarely and is far from retirement will prefer lower initial and annual fees, while someone who plans to make a variety of investments will be more interested in reduced transaction costs.

The costs can also only be viewed in light of other information, such as what the allowable investments are, as it rather defeats the object to have a low cost SIPP that will not allow preferred investments.

Permitted in the pension

Many providers allow any investments permitted by HMRC that will not bring about a tax charge, while others, such as the Attivo Ebor Trustees’ Nursery product only allow bank account investments.

This information is crucial before signing up to a SIPP, as often exit fees and initial costs are high, meaning that it is not a low cost task to switch to another provider should the offering not be correct.

Of the 84 plans or providers listed 40 allow all of the investments listed, with many of those adding additional allowed investments. These are what many consider to be true SIPPs, allowing freedom on investment choices.

A number of providers permit everything bar one category, including @sipp’s Collective SIPP and Taylor Patterson’s Investment SIPP that just restrict commercial property or Standard Life Scottish Life, which allow everything apart from overseas currency. Often these will be because the company is not set up to offer it or does not feel that the investment is within the spirit of SIPP rules.

Here is often where the debates between SIPP providers begin, of what should and should not be allowed. Lisa Webster, senior technical consultant at Hornbuckle Mitchell, says that the decision is made purely on what is in the best interests of the client, “We are not trying to be awkward, we want to help clients, but we don’t accept an investment if we have concerns about it.”

Property rising

Many people will use a SIPP with the intention of buying a property, often pooling assets to make the purchase, meaning that these costs can represent a big expenditure.

The initial buying costs range from zero, from Investacc and Prudential’s Flexible Retirement Plan, to LV=’s £1,300 and Pointon York’s £1,200. These more expensive initial plans do not cut costs on the annual fee to compensate either, charging £200 and £300 respectively, compared to Investacc’s £250. Meanwhile a number of providers charge nothing on an ongoing basis, which can save thousands in the long term.

Redswan offers a comparatively average rate of £550 initially and £250 pa, but this annual charge includes property management, for which others charge handsomely. A number of providers do not offer this, meaning that it would need to be sought elsewhere and at additional cost.

The providers that only state that the transaction and annual fee would be done on a time costed basis would need further investigation, particularly if no approximation, minimum or maximum is provided, as once signed up there is little other option for the investor.

These costs need to be particularly monitored as when buying property between a number of SIPPs the costs can spiral. Without the group structure of a SSAS in place, the number of SIPPs involved in the purchase can multiply a number of the costs.

Losing interest

There has been much debate over the interest rates on SIPP bank accounts, as many providers promise no minimum, charge low rates and do not allow investment in other accounts, effectively holding the investor hostage to poor rates.

Of the 64 providers 14 do not allow investment outside of the preferred provider, while one, Avalon Investment Services, did not disclose whether or not it does. This is a key issue at the moment, as such turbulence in the market is leading many scheme members to boost their cash holdings. Particularly at the moment, when the reliability of many governments’ bonds is being called into question, cash appears to be the only safe haven.

However, just because the account is held within a SIPP, it should not be forgotten that the same Financial Services Compensation Scheme protection applies as though it were a standard bank account, meaning that only £85,000 is covered with each bank or building society licence. This point is particularly key for those who have a low risk tolerance and those who are nearing retirement, and so de-risking their portfolio.

Since the FSCS increased this sum from £50,000 at the end of 2010, the issue is not as pertinent, but with the average SIPP value being more than £195,000 it is possible that cash holdings may exceed the protection limit. This means that providers not allowing investment in other bank accounts are not only locking scheme members into potentially poor returns, they are also potentially putting the capital at risk.

A solution to this is to split the money between SIPPs that use different preferred banks, so half the money could for example be placed in Axa’s SIPP, using the Royal Bank of Scotland, with the rest in Friends Life, using HSBC. Obviously this comes with increased cost, although nothing in the face of losing cash savings if a bank fails.

Even those who are able to invest in more than one bank account need to ensure that the cash is split appropriately. In many cases it can be automatically split between the providers, but this needs to be checked and, if not the case, scheme members need to ensure that they are not overexposed to one institution.

Another reason for searching outside of these preferred accounts is to boost returns. With the current low Bank of England base rate, cash returns across most accounts are delivering paltry returns, if anything, unless fixed for long terms. However, SIPP bank accounts are renowned for being worse than most.

Obviously, cash is usually only used as a temporary measure, as a holding position until the correct investment has been found. That said, the current turbulent market means that it is likely that more is held in cash than usual, as a hedge against the rocky stock market.

Table 7 shows that only nine providers guarantee a minimum interest rate and, of these, six are 0.1% or lower, one is 0.12%, another 0.25% and the highest is 0.3% – hardly inspiring.

The current highest rate of 2% is offered by Scottish Widows, Julian Hodge and Cater Allen accounts. While these look attractive compared to current account rates on the high street, the rest of the accounts do not. Of the 64 listed, only 15 offer rates above the base rate of 0.5%, so more than 75% do not, although some of these rates do increase if certain investment thresholds are met. When the median of the ranges that some providers offer is taken, the average rate across all of them is 0.29%, far below the base rate.

Hunting around for a better interest rate also has to be balanced out with the cost – as most providers charge an initial and often an ongoing fee for doing so. Of the 49 that allow investment in other accounts, only 13 provide this for free, with other charging structures ranging from a per transaction fee, a setup cost, a percentage rate and an annual fee.

Fees are affected in another way by SIPP bank account interest rates, with some providers using the margin taken on the bank account rates to offset lower charges on the overall SIPP. One example of this is Attivo’s MY SIPP plan, which has a bank account interest rate of 0.75%, but the annual fee on this scheme is £495, compared to £250 and zero for its other schemes. While certainly not the highest, £495 pa is also higher than most. Meanwhile, Hargreaves Lansdowne has one of the lowest current interest rates, of between zero and 0.2%, but charges nothing for establishment or annual fees.

Weighing up the options

Options at retirement are another key point for SIPP members. Particularly for those starting a SIPP at a younger age, it is important to keep options open regarding going into drawdown or purchasing an annuity.

Last year’s survey saw a decline in the number of providers offering pre-retirement benefits and this trend has continued. In 2010, the number offering pension contribution insurance dropped from 15% to 11% between April and September, but this has now fallen to 9.6%. A similar trend is seen with increasing contributions, which were offered by 66% of plans in September, compared to 55% now.

While these have declined, at-retirement options have increased, with only Legal & General and European Pensions not offering the full raft, the latter only doing so on child SIPPs, for obvious reasons. In the past year Aviva and Zurich have increased their options, with the latter moving from offering none to offering them all.

Changing the face of SIPPs

It seems likely that regulatory and capital adequacy changes will herald some consolidation in the market, although this has been tipped for a long time and has yet to materialise. With recent speculation that interest rates are set to remain low for a long time, in order to stabilise the economy, it seems that the issue of low bank interest rates are not going away any time soon. This means that revenues for SIPP providers will remain tight and profitability will take a hit.

While some speculate that fees may rise, with such a large marketplace and keen competition it is difficult to see how providers will successfully do this without losing large chunks of new business elsewhere.

However, there is no doubting the appetite for SIPPs, with advisers and investors alike seeing it as the pension product of the moment. Rising new sales figures and the research from Mintel showing that it is becoming an increasingly well known product mean that growth is expected, despite already booming figures at the moment.

However, it has to be questioned whether this boom in business is a good thing. Low cost SIPPs, aimed at those with just £25,000 to invest, still levy high charges when compared to a personal pension. A large proportion of those with a SIPP are paying handsomely and not using it to its full potential, having no interest in purchasing property or more unusual investments. This group are also unlikely to have a pot large enough to diversify it across a number of different investments, meaning that a personal pension, which allows investment in some funds and charges a lot less, could be a far more attractive and suitable option.