Sipps and throwing caution to the wind

There has been a marked increase in consumers choosing to purchase alternative investments with their Sipps over the last three years.

With an average Sipp size of £70,000 to £80,000 and over 800,000 Sipps out there (and the number is growing at 20 per cent to 30 per cent a year), this represents a significant new and enticing market for advisers.

It is not just the growth in Sipps driving this. The flow of dreadful macro-economic news has shaken consumers’ faith in traditional stock market-based investments just at a time when many people are realising that their pension provision may be inadequate. For these reasons investors are increasingly considering putting their wealth into directly held alternative investments, tangible assets that promise uncorrelated and often high returns. In fact in some cases, alternatives are directly responsible for driving the growth in Sipps as investors become more aware of their benefits.

Some pension conversion specialists are witness to a 69 per cent increase in clients transferring their preserved or under-performing personal pensions into a Sipp. As part of the advised process they must establish why clients wish to go down the Sipp route - the desire to get into alternatives is one of the most often cited reasons, alongside under performance and consolidation.

However, the market in alternative investments is still immature. There are many ‘me too’ opportunistic products on offer that range from investments that have been rather naively put together to outright scams. In 2007 there were around 50 directly held alternative investments being distributed that could be held within a Sipp - today there are nearly 300 and a good number of them are poor quality.

Many investments offered to specialists are rejected, and some are completely unsuited to the retail Sipp market and should never form part of a robust retirement plan. It would be completely irresponsible of us to assist in bringing them to market. Consequently some advisers still view alternatives with suspicion and view their non-regulated status as a risk for both them and their clients.

Steps have been taken to try and improve this situation, for example the FSA has been very publicly clamping down on advisers who have been promoting Ucis investments to the wrong audience and significantly, Sipp providers have now been asked to take more responsibility for product governance. It is now no longer acceptable to just verify if an asset is Sipp acceptable - Sipp providers now have to undertake their own due diligence over an increasingly exotic range of investments.

Over the last couple of years the demand placed on Sipp operators has grown immensely and some new products aim to provide in depth analysis on alternative investments on behalf of Sipp operators so that there is at least some form of product governance audit trail.