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