Sipp charges for standard and esoteric investments

Robert Graves, head of pensions technical services at Rowanmoor Group, says advisers could see investment in esoteric assets subject to a standard fee for complex investments, or subject to time-costed fees that will vary depending on the complexity of the due diligence required.

Gregory Kingston, head of marketing and proposition of Suffolk Life, says esoteric investments often require more intensive due diligence to assess compliance with tax regulations - and, increasingly, to assess they are genuine - before they can be accepted and generally require more manual processes.

Once the FCA implements the new capital adequacy regime for Sipp providers, Mr Kingston says Sipp operators will need to reserve a far higher amount of capital for esoteric or ‘non-standard’ investments.

Under the new regime, confirmed in a long-delayed policy statement earlier this month, the FCA said Sipps firms must hold a minimum of £20,000 in reserve, up from £5,000 previously, with the exact amount based a calculation of assets managed with a ‘surcharge’ for ‘non-standard’ assets.

A non-standard asset is simply anything that is not included on the ‘standard’ assets list, which includes: cash; corporate and government bonds; exchange-traded funds; structured products; investment trusts; Oeics and unit trusts; and listed shares. Commercial property is also now considered a standard asset, a reversal of the draft policy which controversially did not include it.

Example of non-standard assets that might require additional reserves to be held include overseas property, or unregulated collective investment schemes.

Mr Kingston says: “That alone will make them (esoteric investments) more expensive and some operators may choose to no longer accept them.”

Neil MacGillivray, head of technical support unit of James Hay, says beyond the simple consideration of whether an asset is ‘standard, ultimately ongoing charges will vary as many may include additional annual charges and trading fees.

Using commercial property as an example, Martin Tilley, director of technical services at Dentons, says costs can vary from a simple outright bricks and mortar purchase, with no borrowing, no Vat and a single lease back to a single tenant, up to multiple party purchases with multiple borrowings in different percentages of ownership with Vat and multiple tenants.

To term both purchases as “commercial property” and charge a single flat fixed fee would be inappropriate, says Mr Tilley, since the latter requires significantly more skill and resource to achieve. His firm, like many, thus charges for property on a time-costed basis.

Mr Tilley says: “Using a simple menu for the additional parts is a possibility but is also complicated since some parties might not be borrowing at all when some others are.

“Further, complications may arise such as chancel repair insurance, environmental issues, deeds of indemnities, etc, all of which will require additional time and expertise to ensure the Sipp has good title and the interests of the beneficiary are protected.”

Where retirement benefits are coming into payment also raises a question, Mr Tilley adds.

Client A may have a single asset to be valued before benefits can be determined. Client B may have three properties, two discretionary managers a Ucis and an unquoted share all of which require valuation before benefits can be paid.

Timings of charges can also vary from ‘up front’ charges such as the annual and establishment fees to ‘on completion’ charges such as property purchase, says Claire Trott, head of technical support at Talbot & Muir.

Vat is an issue and it should be clear where it is chargeable and why, she says.

Ms Trott says: “The majority of trust-based Sipps will charge Vat on their fees but some are set up as an insurance contract and therefore will not, there are even some hybrids out there that charges Vat on only some of their fees.

“The sale of some esoteric investments has been increased to levels not applicable to the work involved and advisers should be clear about the charges for sale as well as purchase at outset.”