August 2008

Protecting your future

In the next 12 months alone there are approximately 350,000 people planning to retire. The risk of volatile markets, plunging house prices and rising inflation is a real concern for them and others looking to retire in the next five to ten years but where can they turn? Should they stay invested in equities and hope the recession doesn't bite too deeply? Should they play safe and head for the cover of cash and fixed interest? Or is there another way to protect their future retirement income?

The past couple of months have seen the start of some form of consolidation in the SIPP market that has been on the cards for some time. Legal and General has taken a majority stake in Suffolk Life, Xafinity has announced the acquisition of Hazell Carr and Hornbuckle Mitchell is rumoured to be preparing for a potential £40m sale.

This activity follows an unprecedented period of growth in the SIPP market, boosted by both the increased flexibility through A-Day and increased confidence in SIPPs following FSA regulation.

Most recently, the confirmation from the DWP that protected rights funds will be allowed the same investment freedoms as non protected rights will provide another welcome boost for the SIPP market. Some firms have sought 'early mover' advantage with a variety of propositions, including privately managed funds. Other SIPP players are likely to be working now on ensuring their propositions are in place for 31 October 2008 - the date on which the new legislation is to take effect.

SIPP development

To understand the benefits of the recent activity to customers, it is helpful to look at how the market is starting to shape up in terms of the types of proposition on offer to the customer.

In simple terms, three distinct SIPP propositions are starting to form in the market:

- The self-service SIPP

- Packaged SIPP propositions

- Bespoke propositions

The self-service SIPP is primarily a low cost SIPP where the customer (or sometimes financial adviser) utilises e-commerce to set up and manage the SIPP. Although it would be easy to suggest that these products are 'entry level' SIPPs, this need not be the case. They can offer a relatively sophisticated range of investments, including direct share ownership via an on-line execution only stockbroking facility. Charges for this type of product are commonly on a transactional basis, with each trade or other transaction being charged as they occur.

The packaged SIPP can take a variety of forms, ranging from life company insured fund propositions to highly sophisticated discretionary managed SIPPs. Due to the wide range of packages on offer, charges vary widely, from asset under management charges to more traditional fee based structures with additional transaction charges, and in some cases a combination of both. One potential advantage of a packaged arrangement is often the discounts that the 'packagers' can offer on the professional services (e.g. discretionary management charges).

Bespoke propositions are what the purists would probably term a 'true SIPP'. Here a full range of investment opportunities will be offered, most commonly on an annual fee/transaction fee basis, with some of the more complex transactions being offered on a 'time cost' basis.

Customer segmentation - selecting the right SIPP

Although not an exact science, each of the proposition types detailed above is likely to appeal to a specific customer segment or demographic.

Self-service SIPPs are likely to appeal to those customers with relatively simple needs who (hopefully) have confidence to manage their own transactions. These types of plan are more likely to be prevalent in the accumulation market, where the customer is making regular contributions and looking to maximise investment growth. The transactional nature of the fee structure, while transparent, can also prove to be relatively expensive - specifically where a large number of transactions are taking place.

Packaged SIPPs will appeal across a wider range of customer types, depending on the package selected. They offer less day-to-day control than the self-service SIPP, but this probably suits the customer better. The use of specialists to whom key tasks are outsourced (e.g. discretionary management or property management services) can provide additional confidence that the SIPP is being run by experts. Prices will vary accordingly, the challenge is to make sure the price being paid matches the quality of product and service being offered. The highly competitive nature of the packaged SIPP market means that it is also the area where the marketing people are most likely to be working overtime and the promise of a 'free SIPP' is not uncommon. In this respect customers would probably be wise to remember the adage that there is 'no such thing as a free lunch'!

Bespoke SIPPs are aimed at the top end of the market. Here customers will either have a reasonable level of knowledge about what it is they want and genuinely value the high quality bespoke service offered, or are simply lucky enough to be able to afford the best so demand it. Prices are likely to be at the top end, but more often than not justify this.

Avoiding indigestion

At the risk of over playing the restaurant analogy, it is likely that more and more varied 'menus' across the proposition type are likely to be appearing in the SIPP space as the market continues to evolve and providers compete more fiercely.

All of this innovation can benefit the customer, but only where the customer is clear about their level of 'appetite'. This could be in terms of appetite for risk, appetite for paying charges, or appetite to handling their own transactions (or not).

It is imperative to understand exactly what is (and isn't) being offered within the menu and price. So if you don't want your SIPP to provide any unpleasant surprises make sure you read all of the details so that you know what you're getting and at what cost, so that it's not the final bill that gives you indigestion!

Ray Chinn
Head of Pensions
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