Sep 28 2016

Sipps: Self-invested worth

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Sipps: Self-invested worth

Even prior to the introduction of pension freedoms in spring 2015, self-invested pension plans (Sipps) were rapidly increasing in popularity. Although a number of factors have contributed to this, the trend has largely been due to consumers continuously favouring a more flexible approach to drawing retirement benefits.

Even prior to the introduction of pension freedoms in spring 2015, self-invested pension plans (Sipps) were rapidly increasing in popularity. Although a number of factors have contributed to this, the trend has largely been due to consumers continuously favouring a more flexible approach to drawing retirement benefits. 

The freedoms have added further weight to this by offering the option to withdraw funds whenever required. Previously, although withdrawals were flexible, policyholders were limited to the Government Actuaries Department (Gad) rate, which was set in relation to age and gender.

Originally designed to target sophisticated and experienced investors, the combination of regulatory change, resultant merger and acquisition activity and overhauls to other savings products means Sipps have now become a much more common household retirement vehicle. 

Indeed, the term “self-invested” is something of an anomaly, as many now use Sipps to invest in the same funds but with the same strategy as standard personal pension arrangements. 

“The Sipp market is in a massive period of change,” says Phil Smith, chief executive officer at Hornbuckle. “It is moving from being a market of complex assets for largely high net-worth clients to being a mainstream retirement solution with something to offer every shape of client.”

In what was a good response to this year’s survey, a total of 68 plans have been reviewed from 52 providers. Notable absences include Carey Pensions, Guardian, Jamieson and Pilling which all failed to complete on this occasion, together with Yorsipp, which refused to participate in any future surveys.

Paying the price

Sipp charges can play a pivotal role in affecting performance and the contrasting approach that providers take in collecting fees is shown in Table 1. In line with the previous survey in April this year, most providers opt for fixed charges across the board, with the remainder charging for time or as a percentage of the fund. There is little in the way of change from April’s survey, with the majority of providers keeping fee levels static. As firms generally review fees on an annual basis, small increases can be expected over time. Table A provides further information about costs associated with crystallisation of benefits.

Property puzzle

Sipps are possibly one of the most flexible and attractive investment wrappers available. Upfront tax relief at the investor’s marginal rate, growth exempt from capital gains tax and the facility to invest in almost any asset means their purpose can stretch beyond the simple generation of a retirement income. 

Investing in commercial property is seen by many as a key reason for choosing a Sipp over other pension schemes, as it is viewed as a great opportunity to combine the benefits of bricks and mortar with substantial tax relief. Table 2 displays some quite telling data on this front.

Upfront charges for investing in commercial property range from nothing to £1,900 and there is the possible, if unlikely, chance of fees being even higher with providers who operate on a time-cost basis. The number of properties has increased dramatically since the survey was last conducted in April, rising from 26,529 to 31,630 (a 19 per cent jump). It will be interesting to see how providers and investors approach the property market in the forthcoming months, especially with the raft of open-ended fund suspensions arising from investors’ mass withdrawals in the wake of Brexit.

Andy Leggett, head of Sipp business development at Barnett Waddingham, highlights changes to energy performance requirements as another obstacle faced by pension providers when investing in commercial property. Part of the problem is that requirements are different in Scotland compared with England and Wales, something that it is imperative for Sipp firms to be aware of. 

He says, “This is a good example of where providers that are experienced and knowledgeable in commercial property can give valuable help to advisers and members. Those who fail to act in time could face fines, be unable to lease their properties, and see their value and marketability decrease.

But on the other hand, those who navigate the changes successfully could see their properties become more valuable in the long-term.”

Table B delves deeper into general commercial property fees, with responses again showing a significant amount of variety. With most firms operating on a fixed basis when applying fees for purchases, borrowing, leasing and environment reports, a handful of providers adopt a time-cost basis. 

Eddy Woore, senior consultant at Mattioli Woods, says that investing in commercial property within a Sipp is highly beneficial, “There is no disadvantage over the long-term compared to diverse, standard investment strategies, and many feel it avoids the fluctuations of markets they don’t understand as well.”

Are they adequate?

Data from the survey presents a picture of how providers are adapting to a landscape that has shifted constantly in recent years. The timing of this year’s survey is a case in point, arriving shortly after the FCA’s new capital adequacy requirements came into force on 1 September. Although it should be noted that all data is as at 1 August 2016, so falls one month shy of the regulator’s deadline. 

The requirements were announced by the regulator back in 2012 to tackle concerns about insufficient capital being held in cases where a provider is being wound down and subsequently transferring benefits elsewhere. 

Table 3 indicates the current state of affairs with regards to capital adequacy of all firms surveyed, including the percentage of the requirement covered, and whether commercial property is being treated a standard or non-standard asset. 

Although many of those surveyed confirmed the minimum requirement is being met, a large number still failed to disclose this information. The ambiguity surrounding how commercial property should be labelled is apparent from the responses, which shows a split between those segmenting the assets as standard and those doing the opposite. It is an early indication of the issues faced by firms attempting to deal with the finer points of the requirements.

Martin Tilley, director of technical services at Dentons, says the demands for quarterly reporting and even the need to confirm capital adequacy levels have been challenging. He says, “This has without doubt been a struggle so far for some of the providers who have exited the market pre-1 September. While holding untouchable capital adequacy is one thing, businesses will still need available capital to continue to run and grow the business.”

Mr Tilley adds providers that do not hold this additional capital may find it difficult to sustain growth, and, inevitably, could become targets for larger firms on the hunt for acquisitions.

However, others believe that firms of all shapes and sizes can still thrive despite the introduction of these requirements. Lee Halpin, marketing manager at @Sipp, suggests, “Traditional full Sipp providers should be well placed to continue to offer pension-led business-funding solutions at a time when new businesses are being created at a record rate.”

All asset types must now be categorised as standard or non-standard, with any not included in the FCA’s pre-defined list of standard assets automatically being classified as non-standard.

Table 4 shows the assets that Sipp organisations are currently offering, and whether these will continue to be offered as a result of the new requirements.

However, the run up to September saw one particular development that called into question the appropriateness of these categorisations.

“Weaknesses in the new regime became apparent even before it took effect,” says Mr Leggett. “When some property funds temporarily closed due to post-Brexit market nerves, they went from being standard assets to non-standard assets overnight although not everyone seemed to agree. This is not satisfactory.”

The new regime now applies nonetheless. 

Dangers of D2C

Historically, many providers would only allow Sipps to be transacted through an adviser and not directly by the consumer.

Sipps, by nature, are more complex than other retirement-based provisions such as personal pensions and annuities, and this lack of consumer understanding could result in a raft of complaints. 

As financial services and pensions have been heavily tarnished in recent years, providers understandably want to guard against further negative sentiment. 

However, the pension freedoms have forced them to change tack and look again at the DIY market, as many consumers feel knowledgeable enough to dodge the advice costs and manage their own investment affairs.

“Direct-to-consumer Sipps will continue to grow in popularity because investors want to take control of their assets in such a volatile time,” says Paul Darvill, director of administration at Talbot and Muir, although Mr Darvill also conceded this approach is potentially risky, particularly for those who are transferring where there are no safeguarded benefits. 

He says, “This could lead to further claims against providers, both ceding and receiving schemes, for losses that the investor was unaware of at the time.”

Greg Kingston, head of product and insight at Suffolk Life says, “The trend towards many Sipp operators refusing to accept certain types of pension transfers without financial advice should be a signal to direct investors not that Sipp operators are necessarily risk-adverse but that complex decisions and pension transfers really do need proper financial advice.”

Winners and losers

The number of new Sipps set-up over the past 12 months appears to have dropped dramatically when comparing data with that collated in April. Table 5 details sales and closures, and accumulates the total value of all Sipps together with the average individual Sipp value. A fall from 166,201 to 92,721 new plans looks concerning on the surface, but it is important to point out that Hargreaves Lansdown – which sold 58,590 in 12 months when the survey was conducted in April – did not disclose sales for this survey.

Interestingly, the average Sipp value has risen from £236,964 to £252,303, but this could be a result of improvements in equity markets or again, simply Hargreaves’ absence.

The total number of Sipps fell since our last survey from 953,991 to 872,189, but again the absence of Hargreaves Lansdown – which in April stated it administers more than 252,000 plans – is clouding what could well have been a sizeable increase. 

Sipp providers have been merging with and acquiring each others’ businesses on a regular basis in recent months. One of the biggest buys was Curtis Banks’ acquisition of Suffolk Life from Legal & General in a deal worth £45m. Rupert Curtis, chief executive of Curtis Banks, says, “Consolidation is happening at all levels, from smaller specialist firms to larger multinationals who may also operate insured Sipps. The reality in the market is that there are few providers with proven ability to handle acquisitions, and fewer still who can accommodate acquisitions of significant scale.”

With this is mind, it appears to be only a matter of time before further activity emerges, as the larger and more resourceful providers look to swoop in and beef up assets under administration. 

“Should there be increased consolidation it will be detrimental to pensions as a whole,” says Mr Darvill, who adds that consumer choice is clearly affected by a reduced number of providers. “Advisers and their clients will be the losers should this happen, with a lack of choice and possibly ending up with a provider they would have never chosen.”

Further, Table 6 looks more in depth at each plan's details including minimum charges, service accreditation and classification of each plan. 

No interest

A major decision made over the summer was the Bank of England opting to cut the base rate of interest to 0.25 per cent – a move that will further lessen the attractiveness of cash holdings. Table C highlights the cash account rates available, including potential charges.

Some of the figures detailed are likely to reduce further over the coming weeks and months as the BoE’s decision begins to make itself felt. Even now, the best cash rate available is a measly 0.6 per cent, and to obtain this is likely to require substantial investment. 

Mr Tilley explains that despite Sipp bank accounts paying little or no interest, some firms retained an ongoing trail interest, which can be a key component of operating profit. He says that although the base rate reduction was largely passed on by the banks, “this may have impacted business models that cannot rely on interest share as a reliable continuing income”.

Mr Tilley adds that providers should have amended business models to take stock of this, but adds that some will be “hit hard by the latest base rate reduction”.

In any case, investors considering a Sipp as their retirement vehicle should have few concerns about this situation. Generally, the purpose of a Sipp is to generate a suitable and flexible retirement income, with the best strategy investing in long-term assets that aim to produce capital growth or high yields. Therefore, the performance of equity markets is of far greater importance.

Interestingly, the base rate reduction could benefit Sipp providers, as annuity rates that were already at historic lows take a further plunge as a result of falling gilt yields. 

Given that annuities are also decidedly inflexible, many investors looking to secure income may become more hesitant and prefer a more flexible approach, so may hold off securing a guaranteed income as part of a short-term retirement strategy.

Brian Davidson, senior pension proposition manager at Alliance Trust Savings, believes the disadvantage of low guaranteed income will outweigh the benefits in many cases. 

Mr Davidson says, “Advisers will need to consider drawdown as the main means of providing a retirement income for more clients. In the wake of pension freedoms, this puts further pressure on advisers to ensure their clients give serious thought to their likely income needs throughout different stages of retirement and how long they are likely to live.”

Keeping up

Technology plays a key role in almost every human activity and the Sipp industry is no exception. With consumers showing desire to handle and manage financial affairs digitally, providers will need to keep pace to meet this growing demand.

“Sustained investment in businesses is a necessity now,” says Mr Smith. He adds that more providers could exit the Sipp market in the next two to three years by failing to keep up with digital progressions.

“Providers that have already started the journey to invest in digital technology will be the ultimate winners. Those that haven’t started yet may need to be consolidated or risk declining at pace.”

One thing that has arguably been clear for many years now is that consumers are not deterred by complexity, so as long as the option they desire can be found within this complexity. It also remains apparent that Sipps will continue to be a fundamental consideration for retirement.

However, with mergers and acquisitions still very much the flavour of the month, the number of providers to choose from is likely to decrease.