The September edition of the FSA’s Advisers Newsletter highlighted some potential concerns with Sipp advice. The FSA says that a high proportion of Sipps resulted from transfers and consolidations of existing pensions. Its review says that these transfers contain a potential risk that “recommendations may be based on access to a broader range of packaged investment funds than under their previous arrangements, rather than because the Sipp provides self-selection of actual investment assets”.
The FSA goes onto say that a stakeholder or personal pension may equally satisfy a customer’s needs, potentially at lower cost.
My issue with this is that it starts from the premise that Sipps are more expensive than personal pensions and stakeholders. That might have been true a few years ago but it is not now, particularly considering that the market-leading stakeholder providers all charge 1.5% for the first 10 years and 1% thereafter.
The FSA has a fair point that if all you are doing is accessing wider investment choice then you should do this through the cheapest vehicle, whether this is a stakeholder, a personal pension or a Sipp.
Therefore, can you demonstrate that the funds in which your client invests are not accessible at lower cost through another sort of pension? This is the first point advisers should note.
The second point to note is the implication in the FSA statement that if the recommendation were made “because the Sipp provides self-selection of actual investment assets”, then that seems to be acceptable.
In recommending that your client go for a Sipp, can you demonstrate that they genuinely require the investment control and flexibility available?
The third point to note is that RU64 applies to Sipps. Just in case we had forgotten that a Sipp is a personal pension, the FSA reminds us that the recommendation of a Sipp must be at least as suitable as a stakeholder pension. This should be one of the easier points to demonstrate given the limited fund ranges, particularly external fund available on stakeholder platforms.
The FSA does not mention anything about other Sipp features that might meet clients’ needs. Things like the ability to borrow; income drawdown via unsecured pensions; income drawdown via alternatively secured pensions; and the ability to invest directly in assets such as commercial property or shares.
Technically speaking, any pension could offer these features but, in practice, it would be rare to find a personal pension or stakeholder that has any of these features except unsecured drawdown.
That means that if your client wants to gear their investments, or invest directly in shares, a Sipp (or a small self administered scheme) is their only choice. If your client is using such features then your recommendation is likely to be on firm ground.
The FSA is clearly on the warpath over Sipp recommendations, whether rightly or wrongly. This is the second time that it has mentioned the subject in one of its newsletters. Advisers should ensure that their Sipp recommendations can satisfy the points noted.
The FSA intends to carry out further thematic work next year including visits to advisers, so do not leave it too long before reviewing your files.
One can only hope that the FSA carries out another themed review, this time to check whether stakeholders are being recommended at the expense of lower-charging personal pensions and Sipps.
John Lawson is head of pensions policy at Standard Life