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Sipp sliding

The dramatic drop in interest rates and the likelihood that they will remain low for some time is exposing the practice of many Sipp providers in taking a cut of the bank interest on the monies held by the Sipp as trustee on behalf of their clients.

If the bank account were in the client’s name this would not be possible but, largely due to HM Revenue & Customs’ requirements, the Sipp, as well as administering the client’s pension scheme, is also required to act as trustee, which means the assets of the scheme, although belonging beneficially to the client, are held in the name of the legal owner – the trustee, including the bank accounts.

This is no different to any other type of trust but, unlike a normal trust, in the case of a Sipp, the trustee does not get involved in any investment decisions, which is one of the most important responsibilities in most trusts – the client and his adviser do all that – it is the essence of the Sipp concept.

So the Sipp trustee is what is known in law as a bare trustee – a trustee who is just responsible for holding the assets.

Yet this quirk of the law enables them, as the bank accounts are in their name, to instruct the bank that they should receive part of the interest on the account, the client getting the balance.

This may not have been too bad – or rather too noticeable – when interest rates were at a decent level but now they are down to their current levels and predicted to fall even further, with many Sipp providers taking a cut of typically between 0.5 per cent and 1 per cent, it is beginning to mean that the amount taken by the Sipp provider is equalling or even exceeding what is left for the client.

It could mean clients get nothing in some cases, as Sipp providers which have these banking arrangements have first call on the interest.

This raises some interesting questions, in particular, is this a proper way for a trustee to behave? After all, trustees are supposed to act primarily in the interest of the beneficiaries of the trust – in this cases, the Sipp client.

Some providers say in the literature that they may derive benefit from bank interest the Sipp receives, some even give their percentage take. But does that really excuse this practice when it could mean the client getting nothing? Worse still are the providers, not all by any means, which will not let their clients put cash on deposit other than with their specified bank. The client is forced to accept interest rates which are usually quite low anyway, even before the Sipp provider has taken its share, compared with what could be obtained elsewhere in the market.

The client really has no redress for this loss of income to their pension fund. That brings us to another sting in this particular tail. Not only are the clients of Sipp providers who take a cut of the interest rate now getting very little return on their cash but there is also a lot more cash on which they are getting this than there was a year or two ago, because, with the current state of the investment markets, clients are understandably cautious at present and are typically holding a much greater portion of their funds in cash than previously.

So the client loses out again and it seems likely, although no one will admit it, that these Sipp providers are quietly doing very well getting their fixed cut on much bigger sums than previously and probably for doing less work as there is not so much to do when funds are sitting in cash than when they are being used to buy and sell investments.

Yet all we hear are complaints from such providers that if they are forced to accept reduced interest margins they may have to increase their administration fees to compensate for this – little sympathy for the client, and no suggestion that it may not be too unreasonable in the current climate to expect them to share some of the pain.

It seems unlikely that anything will be done about this practice on a voluntary basis but Sipps are now regulated and with interest rates as low as they are, it is surely the right time for this opaque method of charging to be revisited.

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Neil Jones is Technical Support Manager with Canada Life’s ican Technical Services Team. Canada Life offers a range of wealth management solutions, including retirement income planning, estate planning and investment solutions from a choice of jurisdictions, including the UK, Isle of Man and Republic of Ireland. A trust can offer significant advantages when an individual is […]

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