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The dark side of Sipps

A-Day There is still much confusion among advisers and investors which needs to be clarified before A-Day, says John Moret

Much has been written about the likely explosion of demand for Sipps after A-Day. Certainly, there is intense activity among many insurance companies, investment houses and administrators in preparation for the new ‘simplified’ world. But there is a darker side to this world of opportunity.

The continuing delays in the publication of the remaining chapters of the Pensions Scheme manual are frustrating. There are still 10 chapters to be issued, with six promised this month including, for Sipps, the all-important chapter on investments. When the remaining four chapters will see the light of day remains unclear.

The delay on the death benefits section may not be unrelated to the consultation document on inheritance tax which requires submissions by the end of this month. The proposals in that document have been well covered but have created another level of uncertainty around the advice process for drawdown and other retirement options in the run-up to A-Day.

A lot of interest has focused on the new freedom of investment which will provide a range of investment opportunities – not least in residential property which has attracted huge amounts of attention.

There has been a predictable backlash. Two weeks ago there were two articles in MM which addressed some of the residential property issues and the lack of competence in the Sipp market.

Even more recently, the Treasury announced plans to consult on widening the range of firms authorised to establish personal pension schemes -including Sipps – and to introduce permitted activity as part of a revision of the regulatory framework of pensions. It is understood that a consultation paper will be produced shortly.

The case for reform is undeniable. Reference to the FSA’s own website shows this. Under the heading, “Protection available to Sipp policyholders” it states: “The Sipp wrapper itself is not regulated by the FSA. This means that not all types of investment you can include within a Sipp are regulated by the FSA and they are not protected by the Financial Services Compensation Scheme. However, while the wrapper is not protected, some investments held in the Sipp can be protected, depending on what they are”.

This does not provide Sipp investors with much comfort – unless their Sipp is deemed to be a “packaged” product which will be subject to the Conduct of Business rules.

In my experience, it is only insurance company-based Sipps which are covered. It is hardly surprising that many investors and prospective investors are confused and the need to take action before the world of Sipps is thrown open to all types of exotica is clear.

What is not so clear is how introducing a permitted activity will deal with the advice issues. The need for clarity around the regulatory implications of the obscure legal structures and arrangements in the Sipp market is not a new issue. I have been talking about it for years and the issue surfaced again with the Treasury some 18 months ago when the implications of the provisions on scheme establishment in the draft simplification legislation were discussed.

Unfortunately, the Sipp world has not spoken with a united voice on this issue. However, there appears to be a strong case for introducing a new regulated activity of scheme administration in a similar way to the custodian activity of “safeguarding and administering assets”. This would clear the way for regulated organisations to be acceptable as scheme establishers after A-Day.

The financial resources and business discipline required to be acceptable as an administrator would ensure a far more robust regime in the future. Administrators would be accountable for the services they provide. Investors would have the comfort of protection through the FSCS – unlike today where it is often unclear whether Sipp assets are protected.

This change would make advice on all investments within a regulated Sipp subject to the Cob rules. There is an urgent need to clarify whether advertising and promotion of potential Sipp investments such as overseas property and exotica should be subject to the rules governing financial promotions – and to provide some certainty and comfort to advisers confronted with clients interested in this type of investment. For now it remains “watch this space” but the signs are encouraging.

Another outstanding issue is the lack of a response by the DWP to submissions in favour of the inclusion of protected rights assets within a Sipp. The consultation period closed in May and nothing has been heard since. It is to be hoped that during this period the DWP will have had the opportunity to assess the full impact of the current restrictions.

Protected rights funds can make up more than 50 per cent of an individual’s transfer value and persistence with the current investment restrictions is unjustified and could harm the take-up of the new simplified pensions, continue to confuse and may prevent investors from optimising their ultimate pension.

These darker sides of Sipps are not to be underestimated. There are good reasons to believe that Sipps, or their successor, will be an important part of the pensions savings world from next April. It is vital that there is an orderly transition into this new world and that investors and advisers are provided with a clear and fair regulatory framework. The opportunity to provide this still remains. Let us hope it is taken.


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