Spotlight AJ BellIt is often said that the only constant in pensions is change. So far in 2014 we’ve seen more than our fair share and we’re still only half way through the year.

So, who better to talk us through it all than Andy Bell, founder of AJ Bell, one of the UK’s largest SIPP operators with around 100,000 customers and just over £20 billion of funds under administration.

Our Marketing Manager, Phillip Bray, posed the questions.

Phillip Bray:

You have a proposition for advisers as well as DIY investors, which has been rebranded to AJ Bell Youinvest, what was the thinking behind the rebrand?

Andy Bell, Chief Executive, AJ Bell

Andy Bell

www.ajbell.co.uk

Andy Bell (right):

Like many businesses which grow up over the years, you end up with a fragmented brand structure. So when we launched Sippdeal the name made perfect sense, but as time marches and we launched our ISAs, all of a sudden people look, see Sippdeal, and think that it doesn’t really make sense.

It’s been a journey on two levels. Firstly, to pull all the main product brands together; Sippdeal has become AJ Bell Youinvest and we’ll move from Sippcentre to AJ Bell Investcentre.

Secondly, we concluded that in financial services name recognition is worth something and therefore worth investing in. So we’ve spent some time and money improving our brand recognition, which has certainly been worthwhile.

Phillip Bray:

When does the change take place with the Sippcentre brand?

Andy Bell:

That’s still to be confirmed, but probably within the next six months, hopefully a bit sooner.

Phillip Bray:

Any other product development in 2014?

Andy Bell:

Nothing major, we’ve done an awful lot over the past few years, in fact there’s a danger of us getting indigestion from the amount of product development we’ve done. What’s important now is to make sure we make best use of what we’ve got.

Having said that, we are quite interested in guided investments, although we’re waiting to see what the regulator’s view is after the thematic review.

Phillip Bray:

Do you see guided investments as a halfway house between advice and DIY?

Andy Bell:

Yes, there’s a whole group of people, often those people previously advised by the banks, who aren’t sophisticated investors and who just want some help but don’t want to pay for advice.

There are probably three markets right now:

  1. Truly DIY, where investors want a platform and to do their own research
  2. Truly advised, where people want a professional to do the work for them
  3. People who want a nudge and some help, but don’t want to pay for formal advice or make all of their own investment decisions

I don’t think either is particularly threatening to the other, although the worst outcome is someone being in the wrong bucket.

Phillip Bray:

Where does a guided process stop and a sale start?

Andy Bell:

Good question, that’s really why we’re being quite cagey.

The journey I have in my mind, and I’m sure there will be many who disagree, would involve getting some basic information, for example the risk appetite which is notoriously difficult to pin down, the time frame for investing and then whether the investor is looking for income or capital growth.

Once you have got those three bits of information you can then put together a reasonable portfolio for someone based on some objective criteria. Although, people would have to make their own decision which wrapper they want to use, ISA, SIPP or unwrapped investment.

We have had some really interesting discussions on this, though the more you dig the more complex it gets. But whoever cracks this nut though will be in a good position.

Phillip Bray:

Do you think the Guidance Guarantee for people at retirement is the starting point for this ‘third way’?

Andy Bell:

I don’t think the Guidance Guarantee will see the light of day.

“I don’t think the Guidance Guarantee will see the light of day.”

Providers don’t want it and most people don’t want it; those who do should go and find an adviser.

I think decision trees are the way forward. The industry should come together on standard forms and decision trees so we’re not all doing our own thing. It’s not beyond the wit of man to come up with something that’s consistent and user friendly.

If someone wants face to face advice they have to accept they are an advised customer and get the adviser to do what they’re good at.

Phillip Bray:

So you don’t think we’ll see teams from product providers giving the guidance over the phone or face to face?

Andy Bell:

I hope not, we’ll certainly be kicking and screaming against it.

We’re just not set up for it and it’s not in our DNA. We’re very comfortable with decision trees and giving people information, but it’s a big jump to giving people advice.

Phillip Bray:

What’s your view of the other changes announced in the Budget?

Andy Bell:

The more I think about it, the more I’m convinced the Government has gone too far.

“I’m convinced the Government has gone too far.”

We put together our proposals for the reform of Drawdown prior to the Budget, but we didn’t go as far as the Government has, because we’d rationalised in our own mind the various problems which would arise. I’m not one for the nanny state, but for me they would have been better following our steer and just allowing people to draw out a higher percentage each year, maybe 10% or 20% per annum. This would provide an element of control, protection and flexibility and if this worked, over time we could move to the totally flexible solution that will be introduced from April next year.

But I think though we’ve jumped off the cliff without a parachute and it could be a bumpy landing.

Phillip Bray:

Do you think Annuity rates will fall as a result of the changes?

Andy Bell:

Yes, lack of demand will mean providers pull out of the market and competition will disappear. I can’t see Annuities surviving this reform in any mass form.

If people don’t need to do it (buy an Annuity) will they do it? I think it’ll take half a generation to get people thinking clearly about what pensions are for.

Phillip Bray:

How will the Budget affect the SIPP market, do you think it’s positive?

Andy Bell:

Yes, I think it’s hard to see that it’s not.

I think there’s two unknowns, one, the tax rate on death and two, will people believe that these rules will be around for any period of time?

Phillip Bray:

You think the tax rate on death will come down from 55%?

“I think more people will choose SIPPs.”

Andy Bell:

Yes, it’ll come down to 35% or 40%.

35% because that’s what it used to be, or 40% to align with Inheritance Tax (IHT) rates, although they might kop out and opt for 45%.

I’d probably opt for 40% if it were me to bring it in line with IHT.

I think if people can convince themselves that the tax breaks are good enough and the changes will be around for any considerable period of time, they will fund a SIPP over an ISA (Individual Savings Account).

In the past it’s been slightly age dependent, younger people have tended to fund ISAs over SIPPs, but I think more and more people will now choose SIPPs.

Phillip Bray:

Do you think there’s any chance of a U-turn by the Government?

Andy Bell:

I don’t think so; it would be too politically embarrassing.

I think they were very pleasantly surprised about the reaction they got in the aftermath of the budget, but only because there wasn’t a politician who could articulate what the changes meant. The opposition were floundering whilst the introduction of Lamborghinis into the debate by the financial press was not very helpful or constructive to a sensible debate.

But to repeat myself, I do think the changes have gone too far, too quickly. My fear is that we will see a complex set of rules introduced to try and protect the new system from tax abuse. It is highly likely that these rules will be ineffective. Press scandal will follow and then further tinkering or worse, a sustained attack on the annual allowance or higher rate tax relief will ensue.

Phillip Bray:

That seems to be the next ‘cab off the rank’ in terms reform. What would you like to see happen to the Annual Allowance and higher rate tax-relief?

Andy Bell:

It would make sense to get rid of the lifetime allowance. I wouldn’t alter higher rate tax-relief now; as a lot of people, who have received higher rate relief on the way in will pay higher rate tax on the way out.

I think the integrity of the pensions system would be compromised if tax-relief was restricted on the way in, unless tax on the way out was also somehow restricted.

Phillip Bray:

How do you respond to the comment that only a small percentage of people remain higher rate taxpayers in retirement, having picked up 40% relief on contributions?

Andy Bell:

I can sort of see the logic, but even more important than my previous arguments is a plea for certainty. At every Budget we get stories that higher rate tax-relief or tax-free cash is going and it distorts the market. So if someone says to me, here’s a set of rules, you can have them for 10 years, like they did with PEPs (Personal Equity Plans), we’ll work with them no matter what they are

Phillip Bray:

You more concerned about certainty rather than the actual rules?

Andy Bell:

Correct, our view is people will always invest money; as long as there is a level playing field, the relative advantages and disadvantages of different investment vehicles don’t really matter. Investors and savers crave confidence in the system and the constant tinkering is one of the biggest weaknesses of our pensions system.

I’d like the rules to be simple and certain.

If it were me, would I alter higher rate tax relief? Probably not. I’d reduce the Annual Allowance before I did that, but if a flat rate of 30% tax-relief was introduced I wouldn’t die in a ditch fighting over it.

Phillip Bray:

Specifically on SIPPs, what do you see as the main challenges over the course of the next year? Is it the Financial Conduct Authority’s (FCA) Capital Adequacy review?

Andy Bell:

Yes, and it’s definitely one I think the FCA are just a little nervous about it all. They’ve opened Pandora’s Box.

They knew it needed opening and it’s not an easy one. The fact the outcome has been delayed for so long is probably testament to that and the FCA clearly don’t want the solution to become the problem.

If the very thing you put in place to protect the consumer destabilises the industry, it isn’t a great regulatory move.

Phillip Bray:

What’s your view on the amount of due diligence a SIPP provider should do on an investment chosen by the member or recommended by an adviser?

“It’s not our job to do detailed due diligence.”

Andy Bell:

We’ve always made it very clear to people it’s our job to make sure an investment can be held in a SIPP without incurring any penal tax charges. It’s not our job to carry out detailed due diligence on that investment because you’ll never have enough information to do it properly.

If an adviser brings an investment to us, it’s their job; if the customer brings it, it’s their job.

The obvious solution is that SIPP operators gravitate to the high ground where it is safe from the threats caused by esoteric and illiquid investments.

We have our own permitted investment list, but I would far rather the FCA stepped in and took us back to an industry wide permitted investment list. It’s then very clear that our job is to check whether or not the investment fits within that list and life is a lot simpler for everyone.

Phillip Bray:

Do you see it happening?

Andy Bell:

Maybe by the back door, and maybe that will be the end result of the capital adequacy rules. “Standard investments” may become the defaqto permitted list. But even the definition of standard investment hasn’t reached a sensible starting point. For example term deposits and commercial property are not on the standard list. But I’m sure all those things will be sorted out and we’ll have a very workable solution, I hope.

Phillip Bray:

When do you think we’ll see some final rules?

Andy Bell:

September time, but it might be later.

Phillip Bray:

Do you see any knock on from the Capital Adequacy review on SIPP pricing?

Andy Bell:

You could argue a case that if we move to a world where investments are standardised then costs could come down.

It is hard not to anticipate that costs for non standard investments may increase and quite sharply at that.
But in reality it’s not something we’ve spent a huge amount of time talking about, our view is that we’ll carry on broadly ‘as is’.

Phillip Bray:

Where do you see the growth coming from over the next few years?

Andy Bell:

We’re seeing growth on both the adviser and the DIY side.

Phillip Bray:

So finally, what do you think are the main factors DIY investors take into account when they are picking a product?

Andy Bell:

I think it’s interesting that the views on how important pricing is are quite polarised. Some say it makes no difference whatsoever, others say at the point of sale it’s the be all and end all.

Like anything though, for some people price is important for others not so much but I personally think price in the DIY market is key, but maybe not so critical in the adviser space.

About the Andy

Andy Bell A graduate of Nottingham University, Andy Bell founded the AJ Bell group in 1995 where he is now Chief Executive, focusing on growth opportunities and strategy.

AJ Bell launched the UK’s first online SIPP in 2000, called Sippdeal (now renamed to AJ Bell Youinvest).

The AJ Bell Group now offers a range of products to the DIY, advised and institutional markets and has approximately 100,00 customers with in excess of £20 billion of assets under administration.

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