SIPPS price war breaks out as tide turns on charges

Average set up fees for Self-Invested Personal Pensions (SIPPs) have been cut by up to 13 per cent in the past year as competition increases in the booming market following a period of unbridled success, the leading financial research company Defaqto says.

And “downward pressure” on other charges including administration fees and investment transaction fees will continue as clients and their advisers focus on value for money in SIPPs, Defaqto predicts.

Its report “SIPPS in the UK 2007- Let battle commence” shows average set-up fees for initial investments of £50,000 have fallen from £306.23 last year to £266.57 now and for £100,000 investments from £299.74 to £261.73. For initial investments of £200,000 and above the average set-up fee is now £255.70.

Report author, and Defaqto’s Group Head of Pensions & Wealth Management, Matt Ward said: “SIPP providers have historically not been under much pressure to reduce charges in what was perceived to be a premium service industry. Now that the tide has turned every penny counts and value for money, from low-cost to premium SIPPs, needs to be proven.

“More providers will be seeking fee structures which balance the base administration duties with the level and complexity of the investment transactions within the SIPP. This could lead to more direct links being made between the administration and transaction fees.”

However he is also concerned about the level of SIPP business conducted on an execution-only basis by consumers which could lead to large numbers of portfolios based on flavour of the month funds or investments.

The report highlights how the April 2006 A-Day reforms have opened the way for a new breed of aggressive pension savers for whom the old concept of regular pension saving may soon become a thing of the past.

Those with large annual bonuses can benefit from rules allowing up to 100 per cent of earnings – subject to a cap which was £215,000 in the last tax year – to be contributed with tax relief into pensions. This could create the conditions for a SIPP season to rival the current ISA season as investors rush to maximise pension tax benefits in the run up to the end of the tax year.

More than a quarter of SIPPs do not charge a set-up fee and in the rush to attract new business other providers may follow. Similarly other providers will offer discounts if clients use panel funds or fund supermarkets.

How administration fees are collected is another factor. Most providers collect the admin fee annually in advance or arrears. Clients benefit most from paying the fee annually in arrears.

Similarly clients should look for admin fees which are capped. Fees charged on a percentage cost basis of 0.5 per cent on £50,000 may look competitive but if the same charge is applied to a £200,000 fund it may not look as competitive. Administration fees currently range from zero to more than £650 annually.

Clients should also carefully examine investment transaction fees – particularly those who are regular traders. There can also be a risk of double charging where the organisation making the trade levies a fee while the organisation recording the value also charges.