We live and work in a heavily regulated environment and with the introduction of RDR it all makes the long standing SIPP versus personal pension (PP) debate more interesting.
As part of the research AJ Bell carries out, Sippcentre advisers are asked to confirm the key drivers for their pension recommendations each year and time and time again the top answers are cost, online functionality and investment flexibility.
Typically at least 90% of advisers will state that cost is the single biggest driver. The starting point for any debate on the use of SIPPs will almost always be the underlying cost. Some will argue that you can achieve the same result in a more cost effective manner, using a traditional PP for example.
Simply stating that SIPPs are expensive when compared to PPs is a little like saying dining in a restaurant is expensive when compared to eating in a local cafe. The starting point in selecting a dining establishment is deciding what to eat and the type of service required. In the same way that there is a choice of restaurant/cafe menu options, with SIPPs and PPs the product can be chosen that offers the investment options, level of service and cost needed.
Of course another point worth emphasising is that no market stands still. In recent years the restaurant trade has seen an explosion in the popularity of establishments offering decent food and efficient service at a price that is often comparable or better than a local cafe. Anyone who has ever had the good fortune to attempt to find a seat in one of the restaurants in the Trafford Centre would attest to this.
This explosion in popularity has been matched in some way by an equivalent development in the pensions market, the growth of the low-cost, high functionality SIPP. SIPPs can now be used to build investment solutions which compete head on with PPs and platforms in terms of price. This has been a key driver for their growth.
The market will continue to develop with one of the key influencing factors being the RDR. There may still be the traditional retail funds around today but a new share classes of funds will appear with the likes of institutional priced funds becoming more common. All of this will help advisers reduce the ultimate price of the underlying investment solution. Low cost online SIPPs are ideally placed to deal with all of this change because they allow dealing in these structures today. Personal pensions and many of the longer standing platforms have work to do if they want to play in this wider arena.
If we look at a case study it will become clear why SIPPs will continue to have a major part to play as a mainstream pension solution:
The important point to focus on here is the impact of the charges in different investment scenarios. Assumptions are based on a male, aged 40, with a transfer value of £100,000 and retirement age of 65. The client is paying a fee direct to the adviser for the advice and initially holds funds in cash