Fixed-Fee Erosion in Low-Value SIPP Pots: When Administration Fees Breach Fair Value

The same fee, a different product

A flat trustee and administration charge of £350 plus VAT is about 0.14% a year on a £250,000 SIPP. On a £15,000 residual pot, after partial transfers or phased drawdown, the same £350 is about 2.33%, before platform custody, an adviser retainer, a discretionary fee, or the fund’s own charges.

PRIN 2A.4 does not allow that result to be answered with the average fee across the book. Principle 12, and the systems-and-controls duty in SYSC 3 and SYSC 6, require the firm to see the cohort the charge is actually falling on.

The arithmetic

The fixed charge is only the first layer. On a £15,000 pot, 2.33% of trustee fee, plus an adviser retainer of 0.75%, platform custody of 0.25%, and a fund ongoing charge of 0.65%, is an all-in drag of about 3.98% a year.

If inflation is 2.5%, the investments have to return about 6.5% a year in nominal terms before the member’s purchasing power stands still. A low-to-medium risk allocation may not clear that hurdle. The pot then falls in real terms by design of the charge, not by market accident.

How small pots arrive

Firms rarely open a bespoke SIPP at £10,000. The small balance is usually what is left.

Why an average is not a control

PRIN 2A.4.1R requires products and services to provide fair value to retail customers in the target market, and to keep doing so over the life of the product. Many bespoke SIPP target markets are written for funds above £100,000 or £200,000. A pot below £30,000, whose fixed costs consume the expected return, has left that market. Where a manufacturer finds that value has failed for a group of customers, PRIN 2A.4 expects action, not a note that the book as a whole looks cheap.

SYSC 3.1.1R and SYSC 6.1.1R are failed in the same place if management information stops at “the average administration charge is £350, which is 0.23% of assets”. That sentence can be true while a lower band is being eroded. Hiding the band behind assets under administration is the opposite of Principle 12.

A segmented pack looks more like this:

• Pots above £100,000, most of the book: fee drag around 0.18%.
• £30,000 to £100,000: around 0.58%.
• £15,000 to £30,000: around 1.62%. This is the amber band.
• Below £15,000: around 4%. This is the red band, and it is a PRIN 2A.8 item for the board even if it is only a small share of assets. It may be a larger share of members.

The measure itself is ordinary:

fee drag = total annual fixed and variable administration and trustee fees, divided by the scheme assets, expressed as a percentage.

A tolerance the board has actually set

• Green. Fee drag at or under 2.0% of the pot. First line handles it in the ordinary course.
• Amber. Above 2.0% and up to 3.5%. The adviser or the member is told, including any right to commute a small pot or to transfer.
• Red. Above 3.5%. Log it as a PRIN 2A.4 value failure. Cap or waive the fee, or start a transfer or commutation, rather than wait for the next annual review.

What a board can do when the band is red

• Cap the percentage. A ceiling, for example 1.5 or 2.0% of assets on a low-value pot, with the operator bearing the rest.
• Offer small-pot commutation where it applies. For residual pots under £10,000, a route under the small-pot rules can pay the member out without triggering the Money Purchase Annual Allowance, and without another year of wrapper fees.
• Make the exit cheap. Once drawdown has left the pot uneconomic, a transfer to a cheaper personal pension or master trust should not itself be an obstacle course.
• Stop creating the residue. Intake and partial-transfer processes should not leave a balance below the provider’s own minimum unless the member’s reason is on the file.

Segmented pot-tier figures give an SMF16 holder something to sign. An average across the whole book does not.

This note sits inside the Consumer Duty governance cornerstone.