One of the key attractions of Sipps is their ability to hold weird and wonderful investments.
Clients who want their Sipps to be the pension equivalent of a tropical fishtank can fill their boots with non-standard investments such as a zoo, airport or football club. Nothing is expressly prohibited in the rules.
Since HMRC tore up its permitted investment list for Sipps on A-Day in 2006 and replaced it with the taxable property rules, in theory, anything can be held in a Sipp. But in practice, Sipp investors are deterred from some investments by hefty tax penalties imposed on anything that can be interpreted as “tangible moveable property”. If you can touch it and move it, forget it.
Sipps cannot invest directly in residential property and neither can they lend money to Sipp members or to businesses and individuals connected to a Sipp member. So the wide investment net – that captures the beauty of Sipps for some people – in fact has its limits.
In addition, Sipp providers and administrators, which conduct due diligence on all potential investments and consider each one on an individual basis, may impose their own restrictions on anything “non-standard” that could require increased capital adequacy. With capital adequacy requirements currently under FCA scrutiny, Sipp providers may be tempted to tread carefully to avoid anything that could be difficult to administer or be deemed too risky for a pension.
A J Bell head of platform marketing Mike Morrison says: “With the FCA’s capital adequecy paper due to come out and the regulator saying non-standard investments like property should have higher capital adequacy requirements, nobody is sure about what is going to happen. We’ve had scare stories about Harlequin Property and unregulated collective investment schemes so providers are scared of holding anything too risky in a pension that is providing retirement income. It makes sense to be cautious.”
Morrison says a return to the permitted investment lists would make it easier for everyone to know what can be held in Sipps. “In the old days at Winterthur, we were asked if we could buy a trawler in Hull, on the basis that it was a floating commercial property, and a snow machine. But I turned down both investments. I’ve always taken a cautious approach,” he says.
Dentons Pension Management director of technical services Martin Tilley says the firm’s most interesting Sipp holdings have been commercial properties.
He says: “We have to be selective as we won’t create any taxable property charges. We had a client who bought half an airport near the Isle of Wight. He was a retired property professional with a passion for aviation. That was a good combination for making it work. Building up the business in the local area helped tourism and other local businesses.
“We also had two recording studios – one in the UK and one in Costa Rica. It was easier to get people to go to Costa Rica than to not-so-sunny Clacton. We’ve had a nightclub and cheese factories but we don’t like land banks or fractional ownership.”
When it comes to grey investment areas such as solar panels – which can potentially fall foul of the tangible and moveable property rules – Dentons prefers to err on the side of caution. It also believes the appetite for less standard investments is prevalent among more sophisticated investors at the medium to top end of the market.
Tilley says: “There have been concerns about an influx of small investors with non-standard investments but we won’t take those with less than £50,000. We’re cautious about clients who are looking to invest in unregulated investments. A Sipp provider isn’t able to do a factfind but we have to bear in mind they have a fiduciary responsibility to clients coming to a Sipp.”
However, there are some non-standard investments that pass muster. Curtis Banks managing director Rupert Curtis highlights the case for investing in allotments through a Sipp. “Allotments are seen as non-standard investments and they can provide a good yield when let to third parties,” he says.
Suffolk Life head of marketing and proposition Greg Kingston says the investment proposals he receives never fail to surprise him. “One investor was constructing a wind turbine. He got the land and planning permission and started building a wind turbine on it. Wind turbines are a grey area about whether or not they are moveable but we think the bigger the better as it’s then impossible to move.
“Because it’s held in a Sipp, it can’t trade as a normal company so instead of generating electricity and putting the value of that in the Sipp, it leases the land to the turbine operator and receives a rent,” says Kingston.
Less recently, Suffolk Life allowed a football stadium to be held in a Sipp.
“We used to own a zoo but sold it; we had a fishing lake and land leased to companies that grow willow for cricket bats. We also have a couple of high-value car parking spaces in London,” says Kingston.
Manufacturing firm Dunlop provided another of Suffolk Life’s interesting investment cases when the company revealed new premises. Management and employees financed the construction through a Suffolk Life Sipp.
James Hay Partnership head of technical support Neil MacGillivray points out that Sipp managers have to be thorough in their due diligence and check that the use of commercial properties by tenants is legal.
He says: “I’ve heard stories within the industry about commercial properties being used by tenants to run a cannabis farm and a brothel. These were not properties we were holding.”
MacGillivray says the onus is on the Sipp provider to ensure the investment is legal and reasonable for a pension fund. He says: “The whole thing about investment in Sipps is the vast majority of pension funds need to be reasonably mandated and boring. Providers have had to tighten the rules about what they would be prepared to accept. Appetite is dampened for more obscure investments. There is a big element of risk with weird and wonderful investments so a lot of Sipp providers have backed away.”
Barnett Waddingham head of Sipp business development Andy Leggett says: “There needs to be a spirit of innovation but not a free-for-all. If innovation is bad because we’ve had rogues peddling scam investments and the regulator clamps down, we have learnt the wrong lesson.”