28 January 2020

At Defaqto, we have often wrestled with how products should be compared to one another within our database especially when those products potentially straddle two different, perceived markets.

Andrew Duthie - Insight Consultant (Wealth & Protection)

25 years ago when Defaqto was founded, products would tend to very much fit into their individual categories. Providers would have separate products marketed as a personal pension or a SIPP and when a client looks to go into drawdown, there would be a separate product for that too (at least as far as branding goes).

We have seen a scaling back of this in recent years, providers now have single ‘cradle to grave’ products which cover basic fund investment, upgrading to wider self-investment and then facilitating drawdown.

Stakeholders are still marketed separately as you would expect given the restrictions applied to qualify as such but they are also in declining numbers, 7 in December 2019 of which only 3 are available through advisers.

However, advisers are still expected by the regulator to consider Stakeholder and Personal Pension before recommending a SIPP so there is very much still a place for this segmenting of the products within Defaqto’s database.

The difficult question

The difficult question for us, advisers also, is what constitutes a Personal Pension and what is a SIPP? Different providers consider different investments to be an upgrade to self-investment. There are those who believe anything more than pension funds is self-investment but equally, some consider unit trusts/OEICs to not be self-investment.

There does not seem to be much official guidance available to make this clear. The FCA Handbook states that a SIPP is, ‘an arrangement which forms all or part of personal pension scheme, which gives the member the power to direct how some or all of the member’s contributions are invested.’

It is not entirely clear how this is different from a ‘standard’ personal pension scheme which, although not as wide ranging in its investment choice, still allows members to choose which funds to invest in. Perhaps that is the key, the personal pension just allows funds whilst a SIPP opens up other investments such as shares or property.

We know that many bespoke SIPP providers feel strongly that a true SIPP can only be one that provides the service and administration to facilitate investment. Any product where there is a fund list, or specifically funds available from the providers fund management arm, would not be considered a SIPP due to a restriction in choice. It could be argued that where a product offers thousands, maybe only hundreds, of funds then this is a wide enough choice for this not to be a concern – purists would argue that there is still a potential conflict though.

Defaqto already split products into different options where different fund lists are available, showing for example a pension fund only version and a pension fund with unit trusts and OEICs version. Quite often, there are different charges for each option.

The grey area

Due to the grey area that exists on when investment in unit trusts and OEICs is a PPP and when it is a SIPP, Defaqto show the version which includes unit trusts and OEICs on both the Personal Pension and SIPP tables within Engage. The version for only pension funds appears in the Personal Pension table whilst any investment over mutual funds appears only in the SIPP table.

As well as this, we have taken the decision that providers who wish to market themselves in a specific space should be able to do so, within reason. Bespoke SIPP providers, so those not owned by a life office or borne out of a platform, will only ever appear on the SIPP table. Other providers are given the choice.

In some cases, the products will appear on both tables though the Personal Pension table will only ever refer to insured pension funds and unit trusts/OEICs.

As part of Defaqto’s Satisfaction Survey for 2019, Defaqto asked advisers (of whom 320 responded) how they would distinguish between personal pensions and SIPPs. Three quarters of respondents stated that they see a SIPP as a product that offers more than pension funds and collectives. This seems to be sound judgement, but still means that products which allow investment in pension funds, collectives and wider investment are stuck in a kind of ‘limbo’ between whether they are classified as a personal pension or SIPP. The answer could depend on what the client is investing in - if exclusively in pension funds and the charging reflects that, then the product is a personal pension. It only becomes a SIPP when the client goes into tradable assets or property for example – usually with an accompanying charge.

So, this should hopefully, reinforce Defaqto’s stance and the way we display products on our system. However it still does not solve conclusively the debate about when a product becomes a SIPP, but then if it did, that would be no fun would it?

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