Jeff Salway sets out the investment platform options for new and existing Sipp investors with charges uppermost in their minds.
The subject of investment platform costs and charges featured prominently when the Financial Conduct Authority (FCA), the City regulator, published the outcome of its year-long study of the platform market in July. The FCA found that charges and the range of available investments on offer were the most important factors for DIY investors when comparing platforms, while lower charges were identified as the main motivation for investors switching platforms.
Cost is an important consideration for platform users managing their pension investments through self-invested personal pensions (Sipps) – a group that has grown greatly in number since drawdown became the retirement income vehicle of choice following the 2015 pension freedoms.
But how can those investors ensure they’re getting the best deal for their retirement pot? As it stands, too few are looking around to see what deals are available and how charges compare. The FCA’s research found that many non-advised investors have simply settled for the first platform they looked at, satisfied that it met their needs.
However, there are compelling reasons to compare the options available, particularly when it comes to drawdown and the charges you pay. After all, if a Sipp will be helping fund 20-30 years of your retirement, high charges will take a big chunk out of your savings and, in some cases, increase the risk of you running out of money before you die.
So we asked The Lang Cat, an Edinburgh-based financial services consultancy, to provide us with comparison tables that make it easier to assess the various costs at different levels of investment.
The tables below – Sipp administration charges (%) and Combined Sipp and drawdown charges – show Sipp charging data for 12 leading direct-to-consumer platforms. A ‘heat map’ visual makes it easy to identify the lowest- and highest-charging platforms. The figures in green are the least expensive, with the shade becoming redder as charges rise. A platform’s colours are based on comparisons between it and other platforms in the table, not with the wider market or any other benchmark.
Drawdown has become more widely used since the pensions freedoms took effect, yet even now, most investors will have at least £50,000 in their pot, so we’ve used that as our starting point.
We look first at the basic Sipp platform administration charges and then at the charges when drawdown costs are factored in (shown in the latter case both as percentages and as pounds and pence).
These latter tables includes the initial and ongoing fees charged for drawdown, where applied, which are shown in a separate column. In some cases, there will also be additional charges for drawdown functions such as setting up and transferring out, which we’ll return to later. They don’t include the fees applied on fund switches, as these are a less significant feature in drawdown investing than they are when building a pot in the first place.
We’ll start by looking at the main administration charges on Sipps. Before we go into the detail, there’s an important caveat to highlight. These figures were put together in July, so they are a snapshot of the market as it was then. Things can change quickly and new propositions can emerge.
The past year has been relatively quiet on that front, in the direct platforms market at least. A notable exception was the acquisition of TD Direct Investing by interactive investor, Money Observer’s parent company, a takeover that created the UK’s second-largest direct platform (after Hargreaves Lansdown).
Turning to the figures, one feature that jumps out is the difference between the cheapest and the most expensive Sipp charges. At the £50,000 level, it goes from 0.18 per cent (£90 a year) with Halifax Share Dealing (and iWeb, which it runs) up to 0.66 per cent (£332) with Willis Owen.
Charles Stanley and AJ Bell, at 0.25 per cent on the first £250,000 of client assets, are also at the low-cost end. The former’s hike to 0.35 per cent on the first £250,000, taking effect on 10 September, will lift it from the low to the midrange for platform fees. However, the broker does waive its Sipp charge for those with combined assets on its platform of more than £30,000, and it waives the platform fee entirely for investors who make a trade in stocks and shares once a month.
Pricing positioning is usually deliberate. While the likes of Halifax Share Dealing/iWeb and Bestinvest target mass-market investors, Willis Owen, Hargreaves Lansdown and (to a lesser extent) The Share Centre tend to play towards the more affluent end of the market.
Flat fee structures put Alliance Trust Savings (ATS) and interactive investor in the ‘relatively affluent’ category too. Flat fees mean you pay a fixed amount, regardless of the size of investment or the level of growth, whereas most platforms still charge a percentage of the invested amount.
So while ATS tends to be more expensive for those with modest pots, the platform becomes increasingly cost-effective from around the £100,000 mark upwards, as our tables show. The same goes for interactive investor, which tweaked its pricing structure as TD Direct Investing investors moved across to their new platform. The quarterly platform charge has risen from £20 to £22.50, adding £10 to the annual charge. As with ATS, this puts it at the costly end of the scale for small pots but makes it great value for average and large portfolios.
As you can see from the Sipp charges table, the most expensive platforms at the £50,000 level are among the cheapest at the £1 million end. There are exceptions, however. Hargreaves Lansdown remains a high charger across all pot sizes, although it becomes more cost-effective when drawdown functions are in effect.
Note that here we’re looking purely at the Sipp administration charges. The full fees you pay will be influenced by the costs of trading, the functions you use and the charge each platform levies for them, which is what we’ll move on to now.
The potential for confusion around drawdown costs was clear from the FCA’s retirement outcomes review, which revealed that there are up to 44 charges on drawdown products and that six in 10 non-advised drawdown consumers don’t know, or aren’t sure, where their money is invested.
The possible impact of drawdown charges is evident from a glance at the tables overpage that show them factored into the costs paid by Sipp investors. This reflects the various events for which several platforms charge additional fees.
AJ Bell, for example, has a £25 fee for one-off events such as payments of income, tax-free lump sums, uncrystallised funds pension lump sums and small lump sums. So while it remains around mid-range in relation to its peers, the extra charges will add considerably to the overall cost for some drawdown investors, and perhaps influence their choice of platform.
Similarly, at Charles Stanley Direct, the £150 fee for each benefit crystallisation and the £50 annual payroll fee take it from low-to-medium, in terms of pure Sipp costs, to the more expensive end of the scale for drawdown investors.
The same goes for Bestinvest, comfortably midrange in terms of Sipp administration costs. For pots of £100,000 or less, it has a £100 initial calculation fee and a £100 annual charge for income that see its charges jump to the more costly end of the scale for Sipp drawdown. At £100,000 and above, there’s no annual income charge, but there is a £90 initial calculation fee. Bestinvest also charges £25 both for ad hoc income payments and alterations to payment amounts or frequency.
The £132 a year drawdown charge levied by Willis Owen cements its status as one of the most expensive Sipp options across all pot sizes. But while ATS and Interactive Investor also levy drawdown charges (of £23.75 a month/£285 a year and £170 a year respectively), their flat fee structures ensure they remain the cheapest options for Sipp drawdown investors investing £500,000 or more.
As we can see, the impact of charges depends to some extent on the size of the pot. At the £50,000 point, there’s a case for looking at platforms that don’t charge Sipp drawdown fees, such as Hargreaves Lansdown, Fidelity and Saga. At the £100,000 mark and upwards, the flat-fee operators come into play.
The pounds and pence table underlines the difference in fees and the potential impact on returns. Costs could reach a point where they will affect the income that can be drawn down and threaten the very sustainability of pension savings. That underlines the fact that it’s important to consider what you want from drawdown, why you’re with a certain platform and what you might gain from comparing it with other options.
The good news is that Sipp drawdown charges vary widely. For example, if you have £50,000 in Sipp drawdown with Saga Investment Services, which has no additional drawdown charges, you’re paying a fee of just £150 a year. The same pot with Willis Owen would have £464 taken out in charges.
At the £250,000 level, someone who chooses interactive investor pays £795 less in charges each year than someone using Hargreaves Lansdown. If you’ve got £1 million or more in your Sipp and you’re drawing down from it, Hargreaves will charge you £2,670 a year more than interactive investor.
Look more closely at the various propositions, however, and other factors come into play. While in cost terms, Hargreaves Lansdown is expensive for bigger investors, its all-inclusive structure favours those making full use of the various drawdown functions. For example, if you’re likely to chop and change funds, you’ll appreciate the likes of Bestinvest, Hargreaves Lansdown and Fidelity not having fees for fund-dealing.
If there’s a possibility that you might empty your drawdown plan prematurely or transfer to another platform, there are some hefty charges out there. While some platforms will let you move away for free, most impose an exit penalty for doing so. The size of that penalty could come as a shock if you don’t check it beforehand, says Justin Modray, director at Candid Financial Advice.
‘Some platforms, notably Fidelity, make no charge. Others can be very expensive. For example, Hargreaves Lansdown charges £30 to close a Sipp account plus a further £25 to transfer cash and £25 per investment transferred in specie (where your money stays invested). So if you transfer an account of 20 funds in specie, it’ll cost you £530.’
As The Lang Cat’s figures show, only a few providers offer drawdown functionality within their overall platform fee. ‘That means investors putting money in a Sipp should think about additional drawdown costs they might incur if they plan to withdraw their funds in the near future,’ says Steve Nelson, The Lang Cat’s head of research.
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Our analysis makes a strong case for shopping around on the basis of charges alone, such is the variation between different platforms.
Choosing a platform should also be about considering its suitability. Whatever you’re paying for a platform and for the Sipp drawdown facilities you use, you want to know you’re using the one most suited to your needs.
For many people, service quality will be a key requirement. It’s a need that may be felt most strongly by those seeking reassurance that they will get their retirement income as and when they want it, and that they will get help if any problems arise.
Another top priority might be the ability to adjust the amount of income being taken and to make ad hoc withdrawals if and when needed. ‘Most platforms should cater for this, but it’s worth checking how much notice they need for amendments and how long ad hoc payments will take to make,’ says Modray. ‘It can vary from days to weeks.’
The availability of a range of investments is also likely to be high up on priority lists, as the FCA’s research found. While most platforms offer a vast range of funds to cater for an array of investor needs, some aren’t so hot when it comes to more esoteric investments. If you have specific requirements that might not be mainstream, it’s worth checking which platforms cater for them.
Functionality for those wanting to hold individual shares, some investment trusts and exchange traded funds can also vary, with some platforms, including Fidelity, not offering share trading facilities.
So there’s plenty to think about when you’re weighing up which platform best meets your Sipp drawdown needs. However, cost will be the key factor for many people. Nelson says: ‘Charges aren’t the only thing to look at when assessing platforms, but it’s worth comparing costs in detail, because significant savings are to be made from switching.’