The Synaptic Guide to SIPPs

The Synaptic guide to SIPPs

Eric Armstrong looks at Synaptic Software’s due diligence capabilities, and why everyone loves a SIPP in the evolving Financial Planning landscape

The worst things you can say regarding SIPPs is that they can be accessed irresponsibly and stuffed full of rubbish. Conmen cold calling pensioners to ‘unlock’ their pensions favour SIPPs, in order to channel funds into ‘better performing’ investment opportunities, like the kind that were offered by Harlequin Properties.

Traded Life Policies, Carbon Credits, Film Investments may also make us squirm, but their accessibility through SIPPs underlines how flexible these wrappers are.

ABI figures show us that individual pensions (and SIPPs) overall nosedived 84% 2012/13 following the first auto enrolment milestone, but strip out the group side and we observe that new contracts written by advisers have been growing fast: more than doubling over the next two years to 216k in Q4 2015, when 90% of individual pensions were SIPPs (75% of which were ‘insured’).

The other interesting trend is the ongoing dominance of the independent advice channel, who represent 80% of SIPP sales by volume. There is an interesting dichotomy between insured and non-insured SIPPs. Non-insured SIPPs represent a third of the volume of insured but hold over 60% of SIPP AUM – indicating that SIPPs deployed by specialist wealth managers and wraps are attracting very wealthy customers.

A look at the historical data shows that in the independent advice sector that we serve, SIPP recommendations have been fairly consistent over the years, including pre and post auto enrolment, but the premium value is increasing.

A further consideration is cost. This was traditionally the product’s Achilles heel, where there was constant opprobrium directed at advisers who selected the more expensive product when not actually requiring the flexibility. As costs have continued to drop as technology has improved, there is less of this kind of criticism.

SIPPS: evidencing your expertise using Synaptic

The three key proofs of suitability that require research relate to:

  1. Features
  2. Price
  3. Risk

Here is a quick demonstration of how the Synaptic Research Suite will provide you with the due diligence you may require, something that can be achieved quickly and easily.

Working with the client, and selecting funds within our chosen asset allocation via Synaptic Fund Research, we are able to build a bespoke portfolio in the Portfolio Builder module:

 evidencing your expertise using Synaptic

Suitability in regards to features

In the independent advice sector that we serve, SIPP recommendations have been fairly consistent over the years, including pre and post auto enrolment, but the premium value is increasing.

The following screenshot shows how a Synaptic Product research user could create a grid to compare and contrast the open market for SIPPs. Once assessed, the Synaptic methodology takes you through filtering and ranking, into a full suitability report.

As with other product categories, working with Synaptic will provide SIPP recommendations with the audit trail showing the basis of the selection. The software will also allow manual input of notes to ensure all due diligence points are captured beyond the normal filtering and ranking process.

Synaptic is also a fantastic tool for ‘looking up’ provider, product or fund details. Tens of thousands of fund fact sheets are downloaded annually by the thousands of advisers who rely on Synaptic

Suitability in regards to features

Suitability in respect of price

The screenshot on following page from Synaptic Comparator indicates the keen competition at the head of the leader board that exists today. A SIPP solution, including platform, wrapper and portfolio (though not adviser charges) comes in at around 1% RIY.

The regulator is rightly concerned at the quality of research and reporting in regards to establishing suitability. Synaptic Comparator is the research tool that allows you to perform your own illustrations; including setting the growth assumptions to match other providers’ illustrations allowing like for like comparisons. It is the only tool that receives details of platform, product and investment charges across a range of products with charges data that is reviewed and signed off by providers.

Suitability in respect of price

Suitability in respect of Risk

This is the only tool that offers full access to the Moody’s Analytics stochastic engine, allowing you to project on existing as well as notional investments.

The following screen shows a series of stochastic projections from the Synaptic Modeller tool. This is the only tool that offers full access to the Moody’s Analytics stochastic engine, allowing you to project on existing as well as notional investments. Although you can customise Modeller, most use the default investment strategy provided off the shelf by Moody’s Analytics (formerly Barrie + Hibbert). This aligns the Moody’s ATRQ with their risk Categories, the latter which are defined by their strategic asset allocations. A ‘Capacity for Loss’ quotient can be calculated for most investments, whether legacy or notional. These can be mapped against the Moody’s Risk model. You can then discuss investment outcomes with your client in terms of probability – in our view the only feasible approach given the huge range of possibilities.

Analysis provided by Synaptic Comparator enables you to capture costs accurately thanks to the R.I.Y. calculation. I have modelled several scenarios: the first maps the probable outcomes generated by Moody’s default strategic asset allocation for the Balanced category (first graph or blue line).

The second graph (or green line) shows the spread of outcomes when costs including platform, product (SIPP) AND Adviser charging are included.

The third calculation (or red line) shows the projections for the investment strategy when inflation is taken into account. This is a difficult call to make as an adviser, which is why access to the industry leading modelling tool becomes very useful. The toll that inflation takes on investments is hard to accept – in Cash, my client is likely to have lost 25% of purchasing power (perhaps a lot more). My strategy is showing a 70% chance of beating the ravages of inflation over the term, but with the hope of significant additional upside. The work that needs to be done to reduce costs – cheaper technology, regulation, investment strategies – is essential in the (relatively) low inflation, low return environment we are in. Any contribution to the compound growth of our investment becomes very valuable.

The FCA requires you to explain the effects of inflation for your clients – something that is unsatisfactory using deterministic cashflow modelling plans. Including a Monte Carlo simulation is the only way forward! Can you do this?

Drawdown facility makes SIPP an ideal pension vehicle

Drawdown facility makes SIPP an ideal pension vehicle

The FCA requires you to explain the effects of inflation for your clients – something that is unsatisfactory using deterministic cashflow modelling plans. Including a Monte Carlo simulation is the only way forward! Can you do this?

Synaptic Product research will also provide the details of the leading propositions’ excellent drawdown capabilities. Pension freedoms have pushed the role of flexible drawdown to the forefront of at retirement planning, making the flexibility of a SIPP a powerful tool in this context. There are 56 different contracts from 13 Providers in Synaptic. Where clients require more control, including the ability ‘to own the relationship contact’ with Provider, the ability to ‘adjust income online’ as well as enjoy ‘automatic rebalancing’, then AEGON, James Hay and Transact lead the pack. Standard Life, Old Mutual and AXA Life have the best financial ratings, though questions marks are currently hanging over the long term platform strategies of some companies which should definitely be considered.

The current icing on the cake for SIPPs comes from its IHT planning capabilities.

We see that advisers are recommending that the SIPP be switched into slow drawdown and other sources of revenue to be exhausted before depleting pension funds. This can of course result in the SIPP being passed seamlessly on to beneficiaries. There is no guarantee that this will always be the case, but there is a good chance that the strategy will hold. Moreover this is a strategy that can and will really benefit middle Englanders at a time that policy is looking to support them when low interest rates are harming savers and the savings gap has become more of a political issue.

This ability to create a financial legacy is also a primary driver for legitimate transfer out of group schemes, again something that will be attractive to a lot of advisers’ clients. The skill and experience of advisers will absolutely be required in these cases.

Any firm that is concerned that their compliance regime may need a review in the current changing pensions and compliance climate should call us on 0800 783 4477.