SIPPs (Self-Invested Personal Pensions) are big business in the UK with more than one million in existence.
Investors would be forgiven for thinking that SIPP providers make the majority of their income from the fees paid by investors. For many SIPP providers that is indeed the case, but some take a cut of the interest paid on the mandated SIPP bank account, which is designed to move money between investments, receive contributions, pay income and hold money in the short term.
It is unclear how many SIPP investors know about this practice, which for some SIPP providers makes up a large percentage of their annual turnover, even with today’s all time low interest rates.
We’ve already made our position on this clear. Whilst we wouldn’t want the practice to be banned, for fear of SIPP fees rising for all investors, we do believe some SIPP providers should be more transparent with their existing members, whilst making it easier for them to take advantage of other deposit accounts.
So much for our opinion, we thought we’d see what the rest of the industry thought and put four questions to some leading figures. Where better to start than with Andrew Roberts, Chairman of the Association of Member Directed Pensions (AMPS).
Andrew Roberts, Chairman, AMPs
Do you believe the practice of SIPP providers taking an interest rate cut should be allowed to continue?
It’s one form of business model which is just as valid as products being funded from a slice of the Annual Management Charge on funds. What is needed is clear information to consumers so that can decide whether to use a SIPP that is financed in part by this method, or one that does not. Having fees related in part to the size of a bank balance is also a fair reflection of the increased responsibility placed on the SIPP operator for increased bank balances.”
Do you believe the new disclosure rules go far enough?
I don’t think they solve the problem. They don’t need to be extended: they need to be replaced.
What would the consequences to the consumer be if the practice were banned?
Margins are very small in the SIPP sector, so it isn’t a case of the interest rate retention being super profits to the SIPP industry, it’s a case of the business model for collecting sufficient income to make the business sustainable in the long term.
If the practice were banned, those companies currently taking an interest rate retention would have to restructure the way they charge.This wouldn’t have to be a simple additional amount per customer.
With capital adequacy around the corner and the Financial Conduct Authority (FCA) seemingly interested in SIPP operators being able to provide fund valuations quickly, I can easily see the banning of interest rate retention for some as the green light to move to fund-based charges i.e. taking a percentage of the whole fund whatever it is invested in. That approach aligns with the capital adequacy proposals and would give income more aligned with the business risk of each new SIPP case.
Anything else you care to add?
It is far better that a SIPP operator has a dedicated bank dealing with the current account, but the consumer should be able to select deposit rates from other institutions approved by the SIPP operator.
Billy Mackay, Marketing Director, AJ Bell
Do you believe the practice of SIPP providers taking an interest rate cut should be allowed to continue?
Yes, we do believe that it should be allowed to continue.
Do you believe the new disclosure rules go far enough?
I do believe that the rules go far enough in relation to SIPPs. You could question whether all SIPP providers are meeting the rules and also whether other areas of the retail savings market should be treated consistently.
When you look at the various approaches adopted for disclosure of charges and interest rates you will see significant inconsistency in the way different platforms and SIPP operators disclose how much they expect to earn from cash margin. At the current time we have one rule for SIPP operators and one rule for everyone else. Platforms, ISA operators, discretionary fund managers, banks etc should all be required to disclose in a manner consistent with SIPPs.
What would the consequences to the consumer be if the practice were banned?
There is little doubt that it would result in increased charges for many clients.
Whenever I talk to a journalist about this I tend to set the challenge of if you have a choice of paying your wages into a current account with no interest with little or no charges or one with a rate of interest in line with base rates but you need to pay a monthly fee which one would they choose. Without exception everyone opts for the current account with no charges. SIPPs are no different. Our experience over many years has shown that clients and advisers will focus on the actual charges of the platform/SIPP and the interest rate offered.
We have always disclosed in our charges and rates that we retain interest on cash but our products remain very popular. The reason for that is simply down to the low-cost nature of our products.
John Fox, Managing Director, Liberty SIPP
Interest on mandated SIPP current accounts is a debate that isn’t going to go away — not least because we won’t let it go away.
At the moment, the business models of a number of larger SIPP providers are based on a practice that is deeply non-TCF and totally underhand.
Why do they do it? For me it is quite simple: they do it so as not to weaken their headline price structure and to mislead customers into thinking they are paying less than they actually are. They also do it because it’s money for old rope. These are primarily corporate SIPP providers that smile at customers while effectively robbing them blind.
The worst thing of all is that, while they know what they are doing is wrong, they are able to convince themselves otherwise.
If the base rate rises by 0.5%, many SIPP providers will see their annual profits rise at the expense of their customers. Is that fair?
Oliver Bowler, Business Development Consultant, Talbot & Muir
Do you believe the practice of SIPP providers taking an interest rate cut should be allowed to continue?
Yes, as long as the details are entirely transparent and the client and adviser can make an informed choice. If the scheme member is receiving a decent return on the cash held on deposit, and the SIPP provider is receiving an extra revenue stream, then I cannot see the issue with the SIPP provider retaining part of the interest. In many cases the provider will have negotiated a favourable rate of interest with the bank concerned, so hopefully both parties benefit from that. Clearly a balance needs to be struck, however, between the amount the provider retains and the amount the bank pays the client: greedy SIPP providers will not prosper.
Do you believe the new disclosure rules go far enough?
I think they are a good start. Greater disclosure should not be a problem for any provider, and if you have nothing to hide you have nothing to fear.
What would the consequences to the consumer be if the practice were banned?
It is likely that some SIPP fees will increase, but otherwise it should not have a major effect. If a SIPP provider relies too heavily on this revenue stream (as opposed to fee income) then they are going to get what they deserve; it is an unreliable source of income, and not a sturdy foundation for any provider.
Anything else you care to add?
We only ask a scheme member to retain a minimum account balance of £1,000 with the scheme bankers, for the payment of fees and any other minor expenses, and they can invest the rest of the fund elsewhere (including with other banks). The amount of interest we receive from our chosen account provider is therefore quite limited as far as the vast majority of our members are concerned. That said, we realise it is important to ensure the client receives a good interest rate on the scheme bank account, and that is something we will always maintain.
Steve Gebbett, an experienced SIPP investor
It is only recently that SIPP providers have had to be transparent to their clients on skimming interest, and , frankly, I would like to see this practice banned.
Most SIPP providers are already paid an annual fee for their administration service, which has to include offering a mandated account, and should not skim their client’s self-invested interest, as they are not adding any value.
Many clients, especially those nearing, or in retirement, do not wish to rely totally on a stock-market lottery with their funds, and it is evident from the significant portion of SIPP funds held in cash, that the total amount being skimmed is significant, despite the current devastatingly low interest rates.
All SIPP providers should be required to offer unrestricted deposit accounts access in their range of permitted investments.
SIPP providers should also clearly point out to their clients that if they hold an outside, personal bank account with the same mandated account financial institution, then only their aggregated cash balances up to £85,000, inside and outside their SIPP, are protected by the FSCS.
What do you think?
Should the current rules be changed or do they go far enough? What would be the consequences of a ban?
We want to hear from you, add your comments below and let’s keep the debate going.
In the meantime, if you are a SIPP investor and would like to consider alternative accounts take a look at our best buy table for SIPP deposit accounts, which you can find by clicking here.
