Clients with a six-figure or bigger sum in a self-invested personal pension can take advantage of many investments that their less wealthy counterparts may baulk at.
A full Sipp gives clients access to more specialist areas such as commercial property, foreign currency, warrants, gilts, futures, options, hedge funds and even private equity.
One popular investment finding its way into both full and low-cost Sipps are exchange traded funds.
A J Bell commercial director Fergus Lyons says ETFs, once a niche investment, are proving more and more popular among clients in both full and low-cost Sipps.
“Exchange traded funds are one of the cheapest ways of tracking the performance of a major index,” says Lyons.
Although relatively recent, ETFs are being used by a growing number of Sipp investors. Lyons says: “They are primarily designed to track a particular index like a tracker fund. This could be a stockmarket index such as the FTSE 100. They can be a good way for British investors to invest in overseas markets as they do not directly invest in international shares.”
Direct investment in commercial property is another popular use of full Sipp funds. Lyons says a restriction in lending criteria introduced as part of simplification resulted in a fall in property’s popularity among smaller funds but for larger funds it is often one of the main reasons for setting up a Sipp.
He says: “Prior to A-Day, a fund could borrow 300 per cent of the value of the fund. Now it is just 50 per cent. So if you had a £25,000 fund, you could have borrowed £100,000. Now someone with a £25,000 fund could only borrow £12,500.”
One area within commercial property that is unusual but increasingly popular is investment in hotel rooms.
Pointon York Sipp technical manager Michael Smith says: “There are number of very large hotel developments around the UK and abroad where the investor buys individual hotel rooms. These are leased long term to a hotel operator and the investor pays a certain return back to the holder.”
But investing in a hotel within a Sipp wrapper is accompanied by strict provisos, says Smith.
“Normally there would be an entitlement to certain usage rights. While no such rights can be granted where a Sipp invests, there is still some interest in Sipping such assets purely as an investment.”
This is because a hotel is viewed as commercial property for Sipp purposes.
“Where a room is being purchased, it will only be classed as commercial where there is no right to usage,” says Smith.
To make it Sippable, the room must be part of a genuine hotel, not just part of a block of flats or a holi-day or timeshare complex. To be accepted as a hotel, the letting arrangements, accommodation and services provided are those that are usually provided by a hotel.
He says: “If in the UK, we would expect the property to be treated as Class C1 for UK planning purposes.”
To avoid a tax charge, a Sipp may not own or have an interest in any furniture, as this would be considered to be a direct interest in tangible moveable property for the purposes of the taxable property rules.
Away from property, investment in unquoted shares is also proving popular. Smith says some full Sipps will avoid unquoted shares because of the strict rules surrounding them.
He says: “While the rules clearly mean that members wanting to invest in their own family or a close relation’s company have not generally been able to do so, we have found there is still a lot of interest in people buying shares in genuine third-party companies where the interest acquired while still reasonable, represents a small percentage of the company.
“A fair proportion of our cases have been new issues raising private equity for growing companies, many potentially with plans to eventually float on Aim.”
The sorts of companies Pointon York Sipp clients have invested in are as diverse as the financial sector, property, aviation and a chain of gourmet salad bars.
Smith says: “The amount paid for such investments has ranged from £3,000 to £100,000. Also, we generally will allow investment in unquoted companies which are simply investment structures so the purpose of the company is to invest in shares, etc.”
Sipp providers are also seeing more investors buy into hedge funds and offshore-based investments.
Suffolk Life head of sales and marketing John Moret says hedge funds are also popular although they still tended to be favoured by investors with very large Sipps.
The Association of Policy Market Makers also claims that traded endowment policies are being bought by Sipp investors.
APMM chairman Brian Goldstein says Teps could play a pivotal role in providing a balanced retirement plan and he claims also claims that the policies provided an almost guaranteed inc- ome retirement stream.
“Investors have experienced the benefits of Teps in retirement planning and Sipps for years, realising that they combine low risk with the potential for capital growth. Teps appeal to many investors because they offer a minimum guarantee made up of the sum assured plus the bonuses accrued to date. Another upside is that they have a set maturity date so investors can pick a policy timed to pay out on a certain date such as leading up to or in retirement, which works well outside Sipps.”
But despite such a plethora of choice, AJ Bell, which is launching an adviser-only version of its full Sipp next January, says advisers should remain cautious when recommending some of the more alter- native Sipp investments.
Lyons says some hedge funds and offshore investments are not transparent enough to include in a pension fund, regardless of how wealthy or risk-toler- ant the client is.
He says: “Before considering what you want to invest in, bear in mind that the FSA has started to turn its attention to Sipps following regulation earlier this year. In the future, it is going to paying more attention, not just to how appropriate a Sipp is for the client but how appropriate the investments within it are.
“That is why I would urge advisers to err on the side of caution when it comes to looking at the client’s options.”