Sarah McCarthy, Independent Financial Adviser, Nottingham, with Investment SenseSarah Bray Independent Financial Adviser with Investment Sense takes a look at the SIPP market and asks whether cheaper is better:

If I had a pound every time I was asked which the cheapest SIPP (Self Invested Pension Plan) was, I wouldn’t quite be able to retire, but I’d be close!

This short question really does open a Pandora’s Box, which I will attempt shed a little light on.

The question of which are the cheapest SIPPs leads naturally to two others, namely, what qualifies as a SIPP and what is cheap? It also presupposes that cost should be the most important factor.

Let’s take a look at each of these in turn.

Firstly, what is a SIPP?

When is a ‘SIPP’ actually a Personal Pension with a large range of funds available from different fund houses?

The dividing line between SIPPs and Personal Pensions used to be clear, however in the past few years bright sparks in the marketing departments of many pension providers have realised the added cache that a SIPP label carries. So much so that it now seems any pension product with a reasonable range of funds available has a SIPP label stamped on it.

The label is in fact not relevant, the range of investments and charges you pay for the wrapper are of far greater importance.

The message therefore is simple; don’t get blinded by the label. Look under the bonnet, make sure the plan you select does everything you need it to, and don’t worry about whether it is called a SIPP or a Personal Pension Plan.

What is cheap?

If you are only buying collectives or funds then charges for the actual pension wrapper, whether it is marketed as a Personal Pension Plan or a SIPP are relatively easy to understand. They generally take the form of a flat fee, this is the case for example with Skandia’s Retirement Account or a percentage of the amount invested for example with Aviva. As you can see from the table below there are also providers who make no initial or annual charge, however these providers tend to charge for transactions.

On the whole the cheaper the SIPP, in terms of initial and annual fees, the less investment flexibility you will have available, although there are notable exceptions to this rule

Once you do start to buy other assets, you will by necessity have to look at SIPPs and here things get complicated. Charges can be made for setting up the SIPP, transferring in, transferring out, annual charges, different charges for protected rights and non protected rights, in specie transfer charges, benefit charges, off panel charges, I could go on but I’m sure you get the picture.

This myriad of complex charges can make it hard to compare the charges of different SIPP providers, however the message is again clear, look carefully at all the fees you will pay, don’t just consider initial and annual charges.

One of the determinants of total return is the costs you pay so it makes sense to reduce these as much as possible, however not at the expense of investment flexibility.

Should cost be the most important factor?

I believe the answer to this question is “no”, don’t get me wrong, cost is important, after all, along with performance and tax it determines the return you get. However I believe that having the right level of investment flexibility and service is more important. After all investment flexibility is surely why most people invest in a SIPP in the first place.

So, to sum up

Avoid getting hung up on labels, SIPP or Personal Pension, it doesn’t really matter what it is called,  look under the bonnet to make sure it is doing everything you need it to.

Your decision which pension to go with should be initially driven by your investment requirements, that is, does the plan allow you to buy your chosen range of assets.

It is only then that cost should come into it.  By all means be ruthless in driving down cost, search for better deals, and negotiate with your provider to reduce their fees, you may be surprised about how flexible providers can be on charges.

So, SIPP’s, the cheaper the better?

It’s hard to give a definitive answer, however my belief is clear, get the investment flexibility you need, then drive down cost as far as you can.

Examples of SIPPs with low initial and annual charges (Correct as of January 2011)

This table only takes into account annual and initial charges, it does not consider any other charges that the SIPP provider may make or investment charges.

Provider Annual Charge Initial Charge Can assets other than funds be purchased?
Alliance Trust Select SIPP £75 pa yearly in advance None Yes
Aviva 0.55% pa reduced depending on fund size None Yes
Best Invest None if £50,000 or more invested None, if more than £50,000 invested or transferred Yes
Fidelelity FundsNetwork £280 core investments, £448 non core investments £112 core investments£326 non core investments Yes
Hargreaves Lansdown £0 if using just funds0.5% max £200 if investing in other assets None Yes
James Hay E SIPP None None Yes
Skandia £52.32 None No
Sippdeal None None Yes
TD Waterhouse 0.5% per annum, min £40, max £100 plus VAT None Yes