2012, a year of challenges for the SIPP market


As savers and investors seek greater control over their retirement planning SIPPs (Self Invested Personal Pensions) have become more and more popular.

However, on the back of increased FSA scrutiny 2012 is likely to be a year of considerable change in the SIPP market with SIPP providers facing a range of challenges.

We’ve spoken to leading SIPP providers to get their views on what the next 12 months might hold for the SIPP industry, and how the changes might affect you, the SIPP investor.

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Investment suitability

We all know that SIPPs have wider investment powers but recent years have seen the rise of the ‘alternative investment’. This has been confirmed to us by a number of SIPP providers. Matthew Rankine of Liberty SIPP who said’: “I believe the press releasing down beat macro-economic news over the past few years has pushed up the demand for these alternative products. From this we (Liberty) have seen a sharp increase in alternative investments from around 50 in 2007 up to almost 300 today.”

James Randall of SIPP provider IPM agrees: “The investments IPM are currently being asked to consider today are far more wide ranging than a few years ago as clients look to achieve yields on their SIPPs which previously may have been possible with more traditional investment structures.”

Take the past three weeks, we have heard of  SIPP investments including  hotel rooms, land in far off countries, particularly the Cayman Islands, car par spaces in Dubai, even bamboo and cemetery plots, all offered for SIPP investment.

Now some of these might be perfectly acceptable, albeit it at the higher end of the risk spectrum, but others could equally be perfect opportunities to lose a significant proportion of your pension. You just have to look at the likes of Keydata, Arch Cru, Lehman Brothers, amongst others, to see that a bad investment decision by the investor or indeed IFA can prove very costly indeed.

Its traditionally been the role of the IFA to review products, assess suitability and then make a recommendation, however the FSA are now suggesting that the SIPP providers themselves, in their role as trustee of the pension fund, should have some role to play in reviewing these more left field and unusual investments.

It’s fair to say that we have some sympathy for that argument, after all the SIPP provider is the trustee. Whilst we believe that the recommendation as to the suitability of a product or otherwise for a particular investor should always rest with the adviser, the SIPP provider, as the trustee of the pension, must also have some duty of care.

How far the FSA will push SIPP providers down the road of assessing SIPP investments only time will tell, but we are already seeing some SIPP providers engaging third parties to independently review more unusual investments before they will let them into their SIPPs.

James Randall of SIPP provider IPM again: “Whilst always looking to assist our introducers and clients, IPM has produced a Permitted Investments List that confirms in its broadest sense what we will and will not accept. We will not allow investments that we cannot administer efficiently or those that could give rise to an unauthorised tax charge. Our due diligence process is in place to ensure that we understand more about the investment. We are not afraid to say ‘no’ to an investment should it not satisfy our due diligence process.”

Investment suitability will undoubtedly be one of the themes of 2012.

Capital Adequacy

To protect the investor and promote business stability the FSA insist that all regulated firms, IFAs and SIPP providers included, meet certain Capital Adequacy criteria. It seems that 2012 will be the year the FSA shines a light on the capital adequacy of SIPP providers.

Currently SIPP providers must retain enough money to cover at least six weeks of overheads.

Last year Milton Cartwright (left), FSA manager of pensions investment policy, said: “What we have found is; for those Sipp operators that come into difficulty it takes a long time to sort them out.  At the moment its six weeks expenses. We have found that six weeks is inadequate when the schemes get into problems. Especially with Ucis or non-mainstream investments.”

The FSA have said they will consult during 2012 before deciding what level capital adequacy should be set for SIPP providers, one things seems certain though, it will be increase and potentially significantly.

So how does this affect you, the SIPP investor?

Well, depending on who provides your SIPP the effect of any changes could be barely noticeable, or indeed far more significant.

A profitable and well run SIPP provider, with a healthy balance sheet, has little to fear from these changes, but consider for a moment a SIPP provider who is not in such a strong position. As they face up to the challenge of maintaining sufficient capital to meet any increase required by the FSA could they put they charges up? Possibly. Could they seek to merge or indeed be taken over by a competitor? Possibly. Could this cause changes for your SIPP in terms of what you pay for your SIPP or who it is held with? Certainly.

Oliver Bowler of Talbot & Muir commented: “Advisers are looking more closely under the bonnet of the SIPP provider when making recommendations nowadays, the comfort of a brand name is no longer enough as profitability and financial stability raise to the top of the adviser’s wish-list.”

The message is clear; when you or your IFA are deciding on a SIPP provider, make sure financial stability is one of the key criteria used in making your selection.

SIPP deposit accounts

Despite all the talk of high risk, left field investments the humble deposit account could come sharply into focus in 2012.

There is any number of reasons why you might leave cash sat in your SIPP, however the rates of interest paid by many SIPP providers on the SIPP bank account are in the most part horrendously poor. Typically the rate is less than Bank Base rate of 0.5%, indeed the UK’s largest SIPP provider, Hargreaves Lansdown pay a paltry 0.25% and even then this is only payable on balances over £50,000; below £50,000 the rate is between 0% and 0.10%.

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There are of course mitigating factors, interest rates are at all time lows and there is little which can be done to buck this trend. Furthermore the SIPP bank account should be seen in similar terms to your own personal current account, which is not somewhere you would leave significant sums for a prolonged period, and the same should be true with regard to your SIPP bank account.

However, it is possible to get around 2% from the likes of Santander and AIB International Savings for instant access SIPP deposit accounts. Even this figure is below current levels of inflation, but it is significantly better than the average SIPP cash account.

You have a choice, you don’t have to put up with the paltry interest rates offered on the mandated SIPP cash accounts, shop around.

Our best buy table for SIPP deposit accounts gives details of a wide range of SIPP deposit accounts, including everything from instant access to long term fixed rates, use it and make your money work harder.

Closing thoughts

2012 could indeed by a year of considerable change in the SIPP market, FSA initiatives regarding Capital Adequacy and investment suitability will no doubt cause headaches for some SIPP providers, which could lead to significant consolidation, meaning the SIPP provider you initially choose might not be actually where you end up.

Of course some SIPP providers will be better placed to deal with any challenges that come along and will undoubtedly turn them into an opportunity.

Our team of Independent Financial Advisers are experienced and knowledgeable and here to help you with your SIPP questions and queries, call them today on 0115 933 8433 or email info@investmentsense.co.uk. You can see some example of where we have helped clients by looking at our SIPP case studies.