We owe it to ourselves as Pension Professionals to make sure that we treat our customers fairly. Over the past three years we have seen a move to restore confidence in pensions, the RDR, auto-enrolment and the pension freedoms introduced in the budget have materially improved the quality and quantity of pension saving in the UK.
But there remains dark pools where the light of reform has not shone and the management of much of the money currently being drawn from SIPPs is the darkest of them. It is quite common to find layers of fees being charged to member accounts that reduce the capital reservoir by 4% pa. The maximum GAD limit for a 65 year old is around 5.5%, even taking into account the charges built into GAD numbers, many SIPPS are creaming off in charges well over half the income that can be safely be paid to SIPP holders.
The Labour party is threatening to cap these charges if re-elected. They will be right to do so unless we, the pension professionals that we profess to be, put our house in order. It is no longer enough to sit back and wait, it is time that those firms that advise on SIPPs, those that manage them and the trustees IGCs and pension managers who preside over the DC schemes which carry the retirement aspirations of the majority of working people in this country stood out against bad practice in the individual drawdown market.
Let us take as an example, Simon Walker of the IOD who this week branded the pay deal for Helge Lund, the new head of gas explorer BG Group “excessive and inflammatory”. Here is his reason for joining other lobbyists (including the IMA) in condemning the settlement
“This pay deal would do serious damage to the reputation of British Business six months ahead of a general election and at a time when the reputation of UK plc is suffering”
Why I pick the IOD out is that they are turning on one of their core members criticising not just the quantum of the payment , but that it was made in breach of the company’s remuneration policy, agreed only months earlier.
It is easy for us as shareholders to agree with Walker, after all it is our money that’s at stake. But when it comes to the money of our staff, or former staff, do we not have a wider duty of care?
For the reputation of UK “pension plc” is suffering.
We know that the pension freedoms that will arrive next April will bring with them the risk of ruin. A recent poll of Londoners suggested that over 60% thought that liberating their pension pot and investing in buy to let was “a good idea”. We can wring our hands as much as we choose, but given the choice between an annuity bought at a time of negative real yields, or advised drawdown where over half the income is dissipated in charges, people are choosing to pay the tax and be done with us.
SIPPs sit in the last chance saloon, some are well managed at a proper price – many aren’t. As we approach next April it is critical that we engage our pubic, educate them on the difference of good from bad and empower people to take the right financial decisions. Otherwise we will be back in the cycle of recrimination, reparation before we get to resolution .
This is one of the reasons among many that people have lost faith in pensions and have invested their money in Buy To Let property which has locked out many first time buyers and thus has a detrimental affect on aspiration, family planning and general well being. Investing in property is dead money. What I mean by that is that money is not invested in the wider economy to allow start ups. This is my biggest gripe. We need more small business. Small business employ more people than large business. We have had structural change due to globalisation, all those middle management and admin type jobs have gone and they will never return as they will be replaced by a flatter management structure for the former and by technology for the latter. Our goverments all of those clowns have refused to reduced charges comparable to the Dutch pension system. This is to their advantage as it means less people will need state benefits in retirement.
Thanks Christina
I think there is a long-term solution that may look like the Dutch way of paying pensions but for now we have to make the best with what we have
Where do you see the costs arising, Henry? A SIPP wrapper usually has a fixed monetary fee for paying drawdown (typically £100-200pa), which is a far cry from the 4% you quote… I assume you’re looking at the costs of underlying investments but, of course, in a SIPP it’s the investor who chooses these, not the SIPP provider. So there will be a range of costs, depending on the investments chosen, but these can be kept very low – some of our clients have a total cost for both drawdown wrapper and investments of less than 80bps pa (£50k fund), or on a £100k fund, less than 60bps pa.
In short: a SIPP can offer very cost-effective drawdown. It’s down to the client/adviser to choose appropriate underlying investments and it is those that will drive the overall cost.
Chris is absolutely right. There are issues with transparency of fees for drawdown – and SIPPs- and there are a plethora of different charges – but for an average SIPP portfolio which currently is c£120k it will be the investment managers fees that will drive the overall cost. There are already clear signs of downward pressure on drawdown charges with a number of investment platforms waiving any drawdown charge and I expect that pressure to continue. However there is a significant regulatory overhead for both advisers and providers with drawdown clients and we really need a much “lighter touch” regulatory regime if costs are to reduce. SIPP providers currently are in the middle of a perfect storm caused by new capital requirements, increased regulatory scrutiny, uncertainty over responsibility for investments following a bizarre FOS judgment (involving Berkeley Burke), commercial pressure as a result of banks cutting interest rates (bank interest margins have been a significant source of revenue for many SIPP providers) and increased operational costs as a result of on developing new systems and processes for the new world of drawdown – which is nowhere near as straightforward as some commentators would have you believe. No wonder we are seeing an increase in M&A activity in this space. If prices on drawdown are to fall then there is more scope for reduction in investment management and advice fees than in the SIPP wrapper fee.
Well said John, Chris.
I’m not clear why this article is so doom and gloom about SIPPs and charges when in fact they offer some of the best value products to a much wider range of clients than ever before. SIPPs more than almost any other retirement product can offer the ultimate in flexibility and at costs more competitive than most traditional providers could dream of…