Sipps are notorious for having layers of complex charges. They are often accused of “double charging” – levying charges on both the use of the Sipp as a wrapper for funds and the individual funds selected within the Sipp.

Often the scale of these charges depends on the kind of Sipp chosen – the charges on a full Sipp, for example, will be higher than those on a low-cost Sipp.

Usually Sipp providers argue that these charges are negligible when dealing with pension funds of more than £100,000.

But recent research by FT Business magazine Money Management suggests otherwise. In the January edition this year, it looked at the impact of charges on full Sipps and low-cost Sipps over 20 years based on a lump sum investment and found that the fund size could be up to 12 per cent smaller on a full Sipp because of the draining effect of higher charges.

However, some say that it is difficult to conduct a meaningful comparison between different types of Sipps as so many assumptions about average charges have to be made in the process. For example, a low-cost Sipp might have no wrapper charges, as at Fidelity’s FundsNetwork, but could have high annual management charges on individual funds selected.

In contrast, a full Sipp from a life company might levy a wrapper charge but much lower annual charges on its insured funds.

Then there are deferred Sipps, which allow the investor to move into a full Sipp once funds have reached a certain level.

Legal & General’s insurance company limited Sipp, for example, charges an optional £300 once funds go above £25,000, which allows access to commercial property investment.

And a Sipp should not be selected on the basis of fees alone. The point of a Sipp is that it allows more investment freedom. As David Dalton-Brown, head of Fidelity FundsNetwork, says: “If you put your money in the wrong fund or pick the wrong portfolio, that can be far more costly than choosing a higher wrapper fee.”

Investors also need to consider whether they really need a full Sipp. Of the 300,000 or so Sipps in the UK, only a few thousand are investing in commercial property, says Tom McPhail of Hargreaves Lansdown, indicating that very few people are interested in the options offered by a full Sipp.

But if investors do opt for a full Sipp, should they be put off by the impact of charges on performance? Low-cost Sipp providers say they combine the best of both worlds, with lower charges and access to better performing funds. The issue is whether investors need the options offered by full Sipps.

If they want to invest in commercial property and direct shares, it is likely that they will be sophisticated enough as investors to feel confident they can outperform the impact of higher charges.

Copyright The Financial Times Limited 2018. All rights reserved.

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