In the light of rising complaints relating to SIPPs, advisers are being encouraged to tighten up their procedures, to prevent both new and existing SIPP holders from being disadvantaged
Financial Ombudsman's Worrying SIPP Complaints
In the last quarter, the number of complaints relating to SIPPs have doubled. More than half of these complaints were upheld.
A very nicely presented annual review of consumer complaints for 2012/2013 from the Financial Ombudsman can be downloaded here.
It’s a big PDF file (6.7M), so it might take a little while to come through.
Getting Advice Is Great, But Only If It’s Great Advice
Unless you have a track record that demonstrates you possess significant financial experience, or you’re an affluent person used to taking control of large sums of money at work or at home, you should always seek advice before you make any changes to your pension arrangements.
This is never more important than if you’re considering moving money from a former employer’s pension scheme. Unless you have exceptional circumstances, chances are you won’t find many advisers who would recommend you transfer away from a good quality ‘final salary’ or ‘defined benefits’ pension scheme.
With SIPP complaints on the increase, here’s a few thoughts on how to find a great adviser to help you decide whether to set up a SIPP by transferring your existing pensions. And what you can do to ensure you continue to get great advice once it’s up and running.
Before You Set Up A SIPP
Most of the SIPP complaints were successful because advisers couldn’t adequately demonstrate the reasons why they recommended a pension transfer. At the heart of the decision is the report on your existing pensions your adviser will produce for you.
Before you appoint any adviser to write a pension report for you, you need the following information:
- A schedule of the adviser's charges for the initial advice and recommendation, the cost of implementing the recommendation, and the on-going fees.
- Proof of the adviser's experience, including testimonials from satisfied clients, and a summary of the qualifications of the adviser who will carry out the work (such as Chartered Financial Planner).
- At least three pension transfer reports done for real clients, similar in nature to your existing pensions (with the names of the clients removed for Data Protection).
Why You Need To See Three Reports From The Adviser
If you’re going to be asked to cough up a fee of 3% or more of your fund value, which could run into thousands of pounds, it’s wholly reasonable to see in advance what you’re going to get for your money.
Checking three reports will identify whether yours will be written just for you. After all, no-one else will have exactly the same pensions as you, so if all three reports look very similar, it should raise alarm bells. You don't want to be paying a big fee for a template, where the adviser or one of the administrators simply inserts a few facts into a pre-written document, which is broadly the same as everyone else's.
The most obvious point is to check is that you understand the language being used in the report. Warren Buffett is credited with saying: “Never invest in something you don’t understand”. So if the reports are confusing or full of jargon, find another adviser.
These are the main things you should see in a pension transfer report:
- Exit penalties on leaving your existing pension
- Loss of benefits, like guaranteed annuity rates
- Effect of charges, which may be covered by your former employer
- Reduced transfer value, in the case of an under-funded scheme
- With profits penalty for leaving the scheme before retirement
- Tax-free cash could be more than 25% in your current scheme
- Lost bonuses, if you don’t remain in the scheme to retirement
- A firm recommendation for a particular type of pension scheme (eg a SIPP, Stakeholder)
- Schedule of charges, including set-up and on-going costs to the adviser and to the new pension administrator
- Confirmation the new scheme meets your aims and is in line with your attitude to risk
If you have a ‘money purchase’ pension, you should see some comparative performance figures. Services like Trustnet from Financial Express publish current prices, so be suspicious of any report containing figures that are more than a few weeks out of date. Evidence suggests some advisers pick key periods to show their recommendations in the best light, in an attempt to win your business.
How Historical Performance Figures Can Be Misleading
Here’s a random example to illustrate how picking the right time period can seriously distort opinion. It’s based on the RBS share price from this time last year. The principle holds true whether it’s a share or a fund, and for whatever period of time you select.
Making RBS Look Bad
On 25 February 2013, the share price stood at 354.80. Six weeks later, it had plummeted exactly 25% to 266.10. People who sold out on 8 April 2013 would be cursing RBS, having lost a quarter of their money.
Making RBS Look Good
On 8 April 2013, the share price stood at 266.10. Six weeks later, it had rocketed to 351.90, growing more than 32%. People who bought shares on 8 April 2013 would have been delighted with RBS.
Over the 12 week period, there was almost no change in price, but there was big money to be made or lost, with opinions being coloured accordingly.
Whilst historical performance is interesting, compared to many other elements, it’s a relatively unimportant reason for deciding whether or not to transfer your pension, for past performance is absolutely no guide to the future.
After You’ve Set Up Your SIPP
If you’re paying an adviser for on-going support, then make sure you get value for money.
With SIPPs in particular, people often forget they’re paying big money to their adviser, which could be 1% of their fund, running into thousands of pounds each year. That’s because they aren’t actually asked to write out a cheque, or transfer money from their bank account. It all happens behind the scenes, between the SIPP operator and the adviser.
You’d be amazed how many SIPP holders get quite a shock when they find out just how much money is being deducted from their fund to pay their adviser. Unless the adviser is making a big difference, consistently delivering measurable increased performance, it can leave you paying for nothing, seriously eroding your SIPP fund in the process.
The charge for advice is on the rise. So you owe it to yourself and your family to ensure you really are getting value for money. And if you’re not, then it won’t come as a surprise to your adviser if they lose your custom. Or worse still, they become the next statistic at the Financial Ombudsman!
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AJ Bell Is Often The Best Value SIPP For Stockmarket Assets
Over time, charges can wipe out a huge part of your fund. We like AJ Bell because there are no set-up costs. If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund. And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment). However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.
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