Self-Invested Personal Pensions (SIPPs) are popular with investors mainly because of the investment flexibility they offer, compared to other forms of pension.
However, regulators have warned that some investors, as well as unscrupulous advisers and salespeople, are taking advantage of this flexibility by taking out or selling investments, which may not meet HMRC rules and could therefore lead to unforeseen tax charges.
One possible solution, to the problem of assessing whether an investment meets HMRC rules, and therefore avoid a tax penalty, would be the return of the permitted investment list.
Essentially this would do ‘what it says on the tin’. But critics argue it wouldn’t work and could restrict the very choice and freedoms SIPPs are designed for.
So we thought we’d asking some leading SIPP providers, whether they are in favour of the introduction of a permitted investment list?
Andy Leggett, Barnett Waddingham
A permitted list of investments sounds like a no-brainer. Sadly, it’s not that simple.
A list offers the allure of certainty. However, it is not what it may appear to be. It would list only permitted investment types, not every individual investment. Nor would it guarantee that investments were safe, still less suitable.
Defining investment types introduces “the rhubarb problem”: is it really a vegetable? Yes. Except that in 1947 a New York court ruled it should be treated as a fruit (for regulatory purposes) as that is how it is used. We have examples with investments: legal battles over whether something is an UCIS (Unregulated Collective Investment Scheme) or not.
No one could take responsibility for a list guaranteeing that investments were safe or even fraud-free. Huge listed companies have fallen victim to fraud or gone bust and governments defaulted on their bonds. Furthermore, investments of every-day types can vary wildly in their riskiness and suitability for any individual.
An alternative, a blacklist of investment, also sounds appealing but suffers practical problems. It would never be complete due to an inevitable lag in adding to the list and legal challenges to it. Again, no one could assume responsibility for it.
What SIPP providers can do is what many are doing: spell out what they do and don’t allow and the reasons why. Perhaps over time a consensus might emerge. Good quality sources help educate and provide an antidote to peddlers of get-rich-quick schemes. But the best protection is surely to appoint an investment professional.
Andy Bell, AJ Bell
I am in favour of a permitted investments list. We have always made it very clear that it is our responsibility to make sure an investment can be held in a SIPP without incurring any penal tax charges. It is however very difficult to carry out effective due diligence on complex and esoteric investments and the truth is the risk far outweighs the reward. In an uncertain world, SIPP operators are gravitating to the high ground, where it is safe from the threats caused by these esoteric and complex investments. This leads to confusion as different SIPP operators adopt different standards.
We have our own informal permitted investment list, but I would far rather the FCA (Financial Conduct Authority) stepped in and took us back to an industry wide permitted investment list.
Francis Moore, European Pensions Management
I’m not in favour of a permitted investment list.
It all comes down to the definition. For example some years ago, a particular firm, which in the end failed, were promoting French hotels in a SIPP; a hotel is a permitted investment.
The real problem comes when you start to get into intense detail, as I said, it all then comes down to the definition and someone will always find a way around the definition.
People put forward the permitted investment list as some sort of panacea, but to be honest, I think it’s intellectually bankrupt.
Andy McLaughlin, Astute Trustees
If I had been asked a few months ago whether there should be a list produced of permitted SIPP investments I would have said no. The HMRC Pension Manual was sufficient guidance.
With Astute Pensions, being the ‘new kid on the block’ , it has been interesting to reflect on the calls we get on a daily basis, asking whether we will accept a SIPP with investments that an existing SIPP provider will no longer allow.
The list of investments quoted by these callers is horrific. Many hold the major part of their investments in UCIS funds or unlisted shares. To make matters worse, quite a number of these quoted shares are suspended and yet the investor is still looking to invest in further money, it is beyond belief.
Right now we are refusing more cases than accepting, because we are not prepared to accept the risk to our business, and our clients, which these applications involve.
So would I welcome a permitted investment list, you bet I would and the sooner the better.
Martin Tilley, Dentons
There is no denying that since the withdrawal of the permitted investment list in April 2006, some SIPP providers have accepted assets which have not been in the best interests of their client, themselves or the SIPP industry in general.
If such a list were reinstated it would need to be tightly drawn to avoid any “interpretation” of whether a particular asset was on it or not. Any uncertainty defeats the object of the list
If it is drawn up tightly, it might restrict innovation in terms of investment which is contrary to the original intent of self-invested pension. Furthermore an investment that meets the parameters of a permitted investment list, may be inappropriately marketed as “SIPP approved” and thus give the investment a degree of credibility it might not deserve. Inexperienced investors might be persuaded by this terminology
SIPP providers might be tempted to rely upon the fact that an asset proposed to them might meet the requirements of any such list and not carry out sufficient due diligence on the investment itself. Thus, esoteric and potentially failing assets could still end up in the hands of inexperienced investors.
The above points demonstrate to me that the SIPP provider’s role in the acceptance of assets will remain crucial and this isn’t only for the clients benefit. Just because an asset appears on the list will not mean that a SIPP provider is bound to accept it.
Thus, irrespective of whether an official list is introduced, SIPP providers will operate their own permitted investment list based upon their regulatory permissions and their own due diligence expertise.
Matthew Rankine, Liberty
I think the SIPP industry is screaming out for such black and white regulations, as most providers are currently being over cautious, hence restricting the investment choice for SIPP members. Currently SIPP providers are technically allowed to invest in assets such as UCIS, third party loans and other non-standard investments, but impending changes to capital adequacy have made providers think twice about accepting these assets into their SIPPs.
You might look at the permitted investment list as restrictive for the end user, but when most providers are already saying no to anything non-standard, the list should, in theory, widen the investment parameters inside of SIPPs.
The abolishing of the permitted invested list was always going to lead to chaos as it established clear boundaries for IFAs, clients and the SIPP provider to work within.
I am sure that it would make life easier for our regulators as well.
Gayle Murray, Xafinity
A return to a permitted investment list may bring a sigh of relief for many SIPP providers, as it removes the headache of often onerous due diligence necessary to allow more complex investments. SIPPs are governed by pension legislation so providers have a moral, and of course regulatory imposed, duty to ensure that no investment falls foul of the rules that could lead to tax charges.
Although the clarity a permitted investment list is attractive, it might stifle the SIPP market. Although the term ‘SIPP’ has been hijacked by some of the big industry names as a mass-market product, in principle it is a pension vehicle that looks to put members in control and enable maximum investment flexibility.
A prescribed list would act as an anchor which has both upsides and downsides. Certainly stronger industry guidelines and standards around due diligence would help the industry, but I’m wondering if we’ve not got this the wrong way around. Might a properly maintained list of exclusions deal with the issues around investments but not stifle creativity?
Nigel Bennett, InvestAcc
A permitted investment list is not a cure all for the SIPP market, but it would be a step in the right direction.
In November 2012 we took a business decision to no longer consider certain investment types, driven by the consultation paper on SIPP Operator Capital Adequacy (CP12/33) published by the FCA’s predecessor.
Our announcement raised a few eyebrows at the time, coming so soon after the regulator’s paper, and we genuinely thought that the rest of the market would have made a similar move. We’ve not regretted that decision, and it has certainly freed up resource in our business.
If a permitted investment list was to be re-introduced, I would not expect it to remove the requirement for us to have a robust due diligence process. In effect, a list would only apply restrictions to the types of investments we’re allowed to consider, and we would still presumably overlay our own criteria to end up with a (possibly) shorter list that is a sub-set of those on the official list. Therefore I don’t believe it’s likely to result in extra freedom of choice for customers, but it would help SIPP operators, some of which have perhaps gone too far in what they will allow in their schemes.
James Randall, IPM
Prior to “A Day”, the SIPP industry operated a Permitted Investments list, negotiated and controlled by HMRC. Liaison between SIPP Provider Group and HMRC sought to develop and expand the list following reasoned argument. eight years on, there is talk of reintroducing this list again.
With the FCA focused on client detriment, SIPP Providers are now in a difficult position with many questions unanswered. What is sufficient due diligence? What is sufficient independent assessment of an investment? Is the SIPP Provider’s role to be the gate-keeper, the party responsible for ensuring suitability and appropriateness of an investment for a client or the SIPP?
The SIPP industry needs clarity of what is expected from it. The role of the SIPP Provider is at odds with the adviser. The SIPP Provider runs the risk of rejecting or delaying an investment to assess due diligence. This may lead to consumer detriment of a different type, investment loss through missed growth.
A split decision
It seems that SIPP providers are split, believe the reintroduction of the permitted investment list would bring certainty, whilst others feel it would strangle innovation and flexibility.
Time will tell whether the regulator chooses to reinstate the list, until then it is down to SIPP providers, advisers and investors to tread carefully to make sure any investments are not only appropriate to the member, but don’t fall foul of HMRC rules.