A clue to the attraction of a Self-Invested Personal Pension (SIPP) is in the name; self-investment, which allows investors to have a wider choice, greater flexibility and more control.
Until now perhaps.
Many of the reasons investors are attracted to SIPPs could be seriously undermined if a recent trend towards more restrictive investment choices continues.
Many SIPP providers, although not all, are restricting the types of investments whey will allow members to hold within their SIPP.
We’ll deal with why in a moment, but let’s look at some examples.
- More ‘left-field’ investments, such as overseas property, unlisted shares and land were the first to see tighter restrictions
- Risky unregulated investments are also being turned away by many, although not all, SIPP providers
- Even cautious investors who want to use deposit accounts, have been hit by one SIPP provider. Suffolk Life has recently introduced a restriction and will now only allow SIPPs to hold accounts with banks or building societies which have an official credit rating. This excludes many bank and building societies, such as Metro Bank, Bath Building Society, Allied Irish and the Mansfield Building Society; all members of the Financial Services Compensation Scheme (FSCS) which guarantee deposits up to £85,000
The new rules are affecting existing members too, many of whom have seen the goal posts moved since they opened their SIPP.
We recently saw a case where a knowledgeable, experienced and most importantly, successful investor, simply wanted to top up an existing investment but was refused permission to do so. Since the original investment was made, the SIPP provider had changed their stance and refused to allow the top up. This left the investor with little choice but to transfer his SIPP elsewhere, incurring significant costs, simply because he wanted to invest as he always had done.
Suffolk Life’s stance will also cause problems. Firstly, it will reduce choice and potentially cut the possible returns to SIPP members using deposit accounts. If the rule is extended to existing members, who presumably believed when selecting Suffolk Life they had the freedom to choose whichever bank or building society they wished (assuming of course the account as ‘sippable’), they will be denied the opportunity to ‘roll over’ money when existing accounts mature.
Why are things changing?
There are a number of reasons behind the changes:
- FCA regulations For the past two years the regulator has been looking at ways of bringing more stability to the SIPP market, especially when a provider fails. The FCA recently published its final rules, which saw investments divided into two categories, ‘standard and ‘non-standard’. Simply put, the greater the number of assets held by a SIPP provider in the ‘non-standard’ category, the higher the amount of money they must leave in reserve
- Rulings by the Financial Ombudsman Service (FOS) As more complaints are ruled on by the FOS it is becoming clearer that some SIPP providers could face hefty compensation bills. Whilst nothing can be done about existing members, SIPP providers can try to cap the problem by reducing the number of unregulated investments they now allow
- Commercial reality For many SIPP providers investments into land, overseas property and other unregulated schemes are not something they do every day. The charges they make don’t currently reflect the added complication of such investments, so why not cut them out all together and make life easier?
Is it a bad thing?
It depends on your point of view.
Tighter controls will hopefully stop unregulated salespeople, in conjunction with certain unscrupulous SIPP providers, working together to abuse the system whilst preying on naive and vulnerable investors.
But, we believe there is a danger that the ‘baby is being thrown out with the bathwater’ and that bona fide investors, who want to use the flexibility offered by a SIPP, are being caught by the unintended consequences of the new rules.
Indeed it isn’t just adventurous investors being caught. In the case of Suffolk Life, very cautious investors, looking to hold money in Cash with banks and building societies perfectly acceptable to most savers, will have to accept less choice and potentially lower returns.
Will the trend continue?
We suspect larger SIPP providers will increasingly focus on core investments, consisting mainly of funds and shares, as well as bank accounts; we don’t expect many to follow the lead taken by Suffolk Life.
More bespoke SIPP providers will have a couple of choices.
If they have sufficient capital as well as the expertise and desire to continue to offer, more investment flexibility, they will continue to do so, where it is appropriate.
However, others, driven by the new capital adequacy rules or the desire to concentrate on their core clients, will no doubt, decide to reduce the range of investments they will allow within their SIPP.
What action should SIPP investors take now?
Not all SIPP investors make full use of the investment flexibility allowed, but nevertheless, there are things all SIPP investor should consider doing right now:
- If you invest in any of the assets we’ve mentioned in this article you should check your SIPP provider’s stance. Have they changed their rules? Do they have any plans to do so?
- If you find yourself caught by new restrictions imposed by your SIPP provider you will have a decision to make; keep your existing SIPP and change your investment strategy, or change your SIPP and keep your investments
- All investors should take time to consider how their provider will react to the new FCA rules. Will fees have to go up as providers look to find more capital? Will the way charges are calculated have to change? SIPP providers have two years to plan for the new rules, investors shouldn’t waste any time in doing the same
We’re here to help
If you are concerned by the new rules and how they might affect you, our team of experts are here to help.