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John Lawson: Time to expose the Sipp world’s big secret


Many providers persist in taking a hidden margin from cash held on deposit within Sipps but this practice is out of keeping with the principles of the RDR and modern transparent pricing.

A cash account within a Sipp is a necessity. It is into the cash account many new transfers are made, pending investment instructions or a commercial property transaction. It is also where asset sales are disbursed, awaiting reinvestment or withdrawal. Some also use it as a safe haven when markets are turbulent.

Once linked up to the Sipp administrator’s admin and reporting system, a cash account is no more expensive to maintain than, say, investment funds. So why do some Sipp providers charge more for keeping investments as cash than they do for Oeics, unit trusts, life funds and investment trusts?

The rate of interest earned on cash deposits by providers is usually not disclosed to the customer. Instead, the provider decides what their own pay rate is: in many cases, a paltry 0.05 per cent or 0.1 per cent.

But what rate do providers earn? The bank accounts providers host on their Sipp platforms are provided by external banking partners. Most Sipp providers should be earning at least 0.5 per cent, although some earn more.

To be fair, the rate Sipp providers have earned on cash deposits has fallen markedly over the last year. Basel III rules prevent Sipp providers from holding Sipp cash – ostensibly instant access cash – on term deposit. Before these new rules came into effect, some Sipp providers were earning over 1 per cent by holding their customers’ cash over longer fixed terms. The new rules require instant access accounts such as Sipp bank accounts to be backed by cash deposits, which are also immediately liquid.

But even when term deposits were permitted, providers were still only passing on tiny rates of interest to their customers and, in some cases, nothing at all.

The FCA has recently stepped into this debate with CP15/30, which reveals Sipp providers are charging their customers £60m a year in hidden retained interest charges.It believes these should be disclosed in key features illustrations.

But will disclosing retained cash interest in a KFI reduction in yield figure really make much difference? After all, it will simply be lumped in with other charges. And how many customers read KFIs, let alone understand them?

Reduction in yield figures remain a mystery to most within the industry and even well-qualified practitioners would be hard pressed to accurately describe how they are calculated.

While including retained Sipp interest within KFI calculations should be a given, the FCA should go further and force Sipp providers to reveal the underlying interest rate they earn from their banking partner.

Sipp providers should also be required to pass on the full rate of interest they receive and take a platform/Sipp admin charge to cover the admin expense of cash bank account holdings.

This would be entirely consistent with the principles of RDR and bring overdue transparency to the Sipp world’s big secret. Clean cash is long overdue.

John Lawson is head of financial research at Aviva


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There are 10 comments at the moment, we would love to hear your opinion too.

  1. Clearly competition is continuing to both the old Life Offices.

  2. It is worse than this. When a transfer is taking place, the incentive to cash in and hold assets in anticipation of other possibly illiquid holdings being encashed, is misaligned with the customer interests

  3. John as I understand it any cash withheld is detailed in the product Key Features documentation.

  4. This seems to be a provider take. When in practice I never allowed significant cash within the SIPP, preferring an external bank account that paid a competitive rate of interest. Small cash amounts were left in the SIPP as it was understood that they didn’t pay interest. When this amount ran out I let the SIPP provider squeal and then transferred cash as required or if appropriate the client deposited another small amount to cover the next 12 months fees. (which was counted as a contribution).

    To this day I have never understood why fees couldn’t be paid outwith the SIPP – as is the case with SSAS.

  5. For some of the providers this has been the main source of platform profits – one leading provider recently told me that “we make no charge when its all in cash” total nonsense and the FSA needs to stop this now it certainly fails the true and not misleading test.
    Harry – the issue is complicated by the LTA as the fees paid externally could be seen as a contribution but its something I will take up via TISA as it would aid transparency

    • Ok so how does a SSAS get round this? After all the fee is for the benefit of the member, even if it is paid by the company. An external fee on a SIPP should have no bearing on the LTA if there was any logic. (Provided of course that no tax relief ensued.) Of course many SIPP contributions are paid by the employer, so why can’t the employer pay the fee as he would do if it were a SSAS?

      The whole thing seems to be a bureaucratic mish-mash.

  6. Does AVIVA think VAT should be charged on SIPP fees as that is not a level playing field?

  7. “Reduction in yield figures remain a mystery to most within the industry and even well-qualified practitioners would be hard pressed to accurately describe how they are calculated.”

    Comments like this are not a good reflection in the industry – RIY is only compound interest (which is taught in school) but has a ‘complicated’ reputation when in truth it is not and is still the best way of calculating a single figure which encapsulates all charges. Just think of it as the amount of growth or return an investment needs just to cover the charges!

  8. Setting aside RIY, there’s a good chance that any SIPP provider not disclosing retention of interest on cash would also be breaking CASS rules.

  9. The FCA and the retail press are ignoring this.
    The fees can be paid outside the SIPP, in exactly the same way they have been payable with ISAs for many years.
    This is in fact a much bigger issue than most readers, regulators and journalists think. I can see circa £30 million in interest being skimmed by just two companies alone.
    Private client stockbrokers call this ‘margin’ and not a charge.

    I have never met a client who is aware of this skimming, nor any who believes it is fair or disclosed. The details are hidden in the T&Cs, and have been noted by the FCA on SIPP reviews. Then again, PPI was covered by T&Cs and had been recognised by the regulator. The argument is that without the skimming the SIPP fees will have to rise. (Que?) That is the answer being given, I kid you not.

    An investor with a major provider asked if I thought they might have to pay the money back (a la PPI): if so, I know of one very public provider who will be hit with a bill for over £100 million.

    Read the accounts, it’s all in there.

    Re RIY, “…..a single figure which encapsulates all charges” Oh no it’s not, a common misconception. The only accurate figure is to take total revenue as a % of funds. Providers may obfuscate in marketing literature, but they dare not mislead HMRC.

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