SIPP scrutiny and a challenging year for pension consolidation
Andrew Roberts of Barnett Waddingham looks at how changes in the SIPP market are affecting advisers wanting to consolidate clients’ pension pots.
Only a few years ago, it seemed natural to advise clients on consolidating various pension plans into one SIPP or move from SSAS to a low cost SIPP. As a result, it is widely reported that there are now over one million people with SIPPs in the UK. Whilst the majority of these are with the top five providers – insurance companies offering PPP+ style contracts and platforms offering online investment switching and servicing – an estimated 200,000 people have bespoke SIPPs from specialist administrators.
By contrast, there are an estimated 35,000 SSASs representing up to, say, 100,000 people, with hitherto little growth since the new pension rules were introduced in 2006, contrasting starkly with the progression in the SIPP industry.
But the last 18 months has seen the SIPP market under fire and RDR compel independent advisers to consider whether SSAS could be more suitable after all.
Specialist SIPP providers, which sprung up as an alternative to the strictures of insurers and so are typically independent of them or other large financial institutions, are currently awaiting final rules from the Financial Conduct Authority as to how much capital they need to hold in reserve to carry on in business. The proposed rules set an amount dependent on the underlying book of business. Under the proposals, it would not be unusual for a firm to have to increase its resources ten-fold, say, from £50,000 to £500,000. Understanding how a provider will finance any increase will be an essential part of the advice process when recommending a SIPP. Whilst SIPP providers may not disclose information about their future business plans, it is reasonable to ask enough questions to assess their financial standing and commitment to the SIPP market for the foreseeable future. Bear in mind that the rules are likely to penalise providers with high levels of non- standard assets and so analysis breakdown of the underlying assets across a provider’s total portfolio will be useful.
Data on the SSAS industry is hard to obtain but anecdotally it seems advisers are beginning to look at SSAS as an alternative to SIPP. This is not limited to those clients wanting to use the loan back facility. A SSAS allows more control over a client’s pension savings than a SIPP (which is tied to one provider) allows and this can be attractive for business owners.
An emerging issue though is the use of small occupational pension schemes – whether structured as a SSAS or not – to access the sorts of unusual investments that SIPP providers are now blocking. Demand for investing pension money in these racy investments has not gone away as the public are still allured by investments promising high returns and cash incentives for investing. Using a SSAS is no protection though from investment defaults or frauds.
HMRC now intervene in the process when registering new pension schemes for tax relief. Advisers may have to factor in a slightly longer set-up time if advising a client to set up a SSAS and expect transfers in to go through a more thorough vetting process by the transferring scheme administrator. In theory, this should not be of concern for SSASs set up by clients with well- established companies, but inevitably there may be cases that are unfairly blocked. To minimise the chance of this, it may be worth explaining to the transferring scheme the reasons for the transfer, even going so far as to provide a copy of the recommendation report.
So, with the SIPP industry facing a period of uncertainty and transferring schemes vetting transfers out, this could continue to be a challenging year for those advising on consolidating pension pots.
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