As I sat down to write this at the start of January I realised I was discussing a prospective InvestEngine SIPP this time last year, planning with colleagues the type of products we wanted to see in the market as investors ourselves ….While it has been over a year in the making, I’ve now been testing the IE SIPP internally for few weeks. It’s set to be launched for customer’s later this month as what will be arguably the cheapest SIPP on the market; I think we’re sure to turn some heads.
It got me thinking, not so long ago, SIPPs and portfolio-based investing more generally were exclusive to the affluent, tailored for those with substantial pension funds. But over the last few years they have started to be transformed into products accessible to a broader audience, helping people take control of their retirement planning and driving down costs in the industry.
SIPPs a short history
I had to do a quick bit of googling to learn that Nigel Lawson announced ‘new investment freedoms for personal pension investors’ in his 1989 budget speech. A free market, Thatcherite style reform unlocking a market to give individuals the power to pick where their retirement funds were invested. SIPPs were born, with James Hay offering the first true SIPP product in spring of 1990 . Looking forward 34 years there’s now estimated to be over £60 billion held in over 800,000 SIPPs, with this number only set to grow with the latest round of pension reforms announced in November (more on that later).
The cost of SIPPs has also evolved over time. Historically, it was advised that SIPPs were suitable only for those with ‘at least £100,000’ in their pension pot due to the higher charges associated with these plans — that’s more than £250k in 2024 money — quite a high hurdle for your everyday investor. However, increased competition among SIPP providers, as well as wider changes to retail investing has led these costs to tumble over the years.
Today most providers charge a percentage of the total investment portfolio, usually between 0.25-0.45% per year and a few notable platforms with fixed monthly costs (FreeTrade Plus £9.99 per month & Interactive Investors from £5.99 to £21.99 per month)*
The latest offering in the market, InvestEngine’s SIPP, will launch later this month with a fee of 0.15%* capped at £200 per annum and no trading charges for the DIY portfolios.
Why are SIPPs such an important product for 2024
In an era of fiscal drag, where Income tax bands are quite literally not keeping up with inflation, we’re seeing more and more people getting dragged into higher tax rate bands. This can mean effective tax rates of +40% or even +60% for people on relatively normal income (higher still for anyone living in Scotland). This makes it more important than ever to reduce your tax bill where you can. Pension can help you do just that!
We’re also witnessing fierce competition continuing to drive down costs in the funds you can hold within SIPPs. DWS’s Xtracker announced price cuts across their European ETFs and State Street’s flagship S&P 500 Funds have dropped their Total Expense Ratios (TER) to a staggeringly low 0.03%. This is all good news for investors, mirroring trends we’ve seen in the US in recent years, promoting efficiency and innovation in the sector.
Finally, going full circle back to pension reforms. It was Lawson’s reforms which gave rise to the SIPP and I’m hopeful Jeremy Hunt’s ‘pot for life’ proposals, mentioned in the autumn statement, will help drive the next wave of growth in retirement savings & SIPPs. These changes** will empower employees to choose their pension provider and request both current and future employers to contribute to their selected retirement fund. This could help liberate billions from stagnant employee pension funds, which are often subject to high fees and poor performance, leading to suboptimal outcomes for savers.
I’m excited to see what the future holds, both for InvestEngine’s newest SIPP offering as well as the market as a whole.
*These products all have additional costs associated with the underlying Investments and potentially other fees. I’m not recommending any services here and the suitability of these SIPPs will depend on individuals’ own personal circumstances.
** These proposals are current undergoing a call for evidence