REGULATORY scrutiny of self-invested personal pensions (Sipps) is intensifying amid growing concern over the way in which they are sold and used.
Pension investors in the UK hold around 825,000 Sipps worth almost £89 billion, according to Money Management magazine’s most recent survey of the market, although the rate of growth has tailed off slightly this year.
Sipps – which are pension tax wrappers – give investors added choice, flexibility and freedom when it comes to retirement funding, either with the help of financial advisers or on a DIY basis. They have been around since the late 1980s but it was with pensions simplification in 2006 that the market really took off.
Their appeal lies largely in the range of investments that can be held in the wrapper – yet it’s those underlying investments that can pose a threat to investors.
While assets such as residential property can’t be held in a Sipp, there’s no definitive list of what investments can and cannot be held in one. That was scrapped in 2006, hence the subsequent flood of money into Sipps. So the wrapper can contain anything from cash and gilts to commercial property and unregulated collective investment schemes (Ucis, currently the subject of a separate FSA investigation).
And it’s that huge range of investments being sold within Sipps that is worrying the regulator.
The Financial Services Authority (FSA) has published the results of a review of the sector, and it doesn’t paint a pretty picture. It warned of Sipp operators putting investors at risk of significant detriment through a “failure to adequately control their business” and said some Sipps had been a “conduit for financial crime”.
This is not a new concern, according to Steven Dunn, head of pensions at Anderson Strathern in Edinburgh, pointing to a 2009 FSA report that also identified issues with Sipp operators.
“It was one of the reasons the FSA took on the role of regulating the administration of Sipps in April 2007, since when operators have had to have the relevant FSA permissions to ‘establish, operate or wind up a personal pension scheme’, including Sipps,” he said.
The latest report came three months after the Serious Fraud Office warned that most frauds involving overseas property and bio-fuel investments were targeting Sipp investors, with some success.
Concern over the investments held in them shouldn’t obscure the fact that Sipps are suitable for some investors and can have considerable advantages in those cases. But the vast range of assets that can be held within Sipps is one reason, along with the charges, why those investors are in a small minority.
Traditional pensions and Isas are more than sufficient for most people saving for retirement, said Dunn. “There is no doubt that Sipps have their place, but they are not suitable for everyone, and many investors may have jumped on the bandwagon and taken out a Sipp when an alternative form of personal pension would have been better.”
In most cases, the decision on whether to use a Sipp comes down to the individual’s investment needs, according to Tom Munro, director of Tom Munro Financial Solutions in Larbert.
“For example, high-net-worth individuals with investment experience usually require more sophisticated portfolios diversifying across several asset classes,” he said.
But too many investors pay “eye-watering” Sipp charges just to access investment funds that are also available in cheaper standard personal pensions, he added.
If you’re thinking about using a Sipp, or wondering if you’re getting value out of your Sipp arrangements, the other big factors to look at are charges and the size of your pension.
The two are interlinked, as Sipp fees tend to be fixed. At the pricier end they’re between £500 and £750 a year – fine for a pension fund of £200,000 but hard to justify for one of, say, £20,000.
Almost half of Sipp providers (which range from Sipp specialists and platform providers to insurers including Scottish Widows and Standard Life) charge £400 a year or more, Defaqto research shows.
And that’s before initial charges, transaction charges and, where relevant, property purchase fees.
Choice is widening, with a growing number of low-cost online Sipps targeting DIY investors – many with no initial or annual charges.
“All you’re likely to pay on these are the costs for online share-dealing or discounted funds and these arrangements are available to most people,” said Munro.
“Even with just £100 a month or so you can set up a Sipp account, choose a couple of funds and manage the whole thing online very easily, but there’s no protection if things don’t work out.”
Nevertheless, IFAs and financial planners usually look at around £150,000 as the minimum pension pot suitable for a Sipp, while the FSA has put the figure at £250,000 for the more expensive Sipps.
As it stands, however, the average pension fund size in Sipps is £107,000.
“In my opinion, investors should be looking at a transfer value of £100,000 or minimum contributions of around £20,000 a year,” said Dunn.
“Due to their higher management charges, Sipps are probably best for individuals who have a sizeable transfer value from other personal pensions to invest or who intend making annual contributions of a minimum amount.”
As the FSA’s latest warning underlines, it’s never been more important if you do use a Sipp to do your homework on the provider and understand where your money is invested.
“The FSA report highlights the need for potential investors to do ‘due diligence’ on Sipp operators and ask questions about the systems and staff before taking out a Sipp with them,” said Dunn.