The forthcoming pension reforms and the upcoming removal of the 55 per cent ‘death tax’ for pensions have been positive news for many pension savers.
For investors, the additional flexibility to keep your retirement fund invested, and for you to pass it on after death without prohibitive tax charges, has generated further interest in self-invested personal pensions (Sipps).
But while the reforms scheduled for April are designed to maximise flexibility, with many in the investment industry looking to target retirees through specific multi-asset income funds, the FCA is keeping a close eye on Sipp operators and what they are accepting as eligible investments.
In 2012 the regulator (then the FSA) issued a consultation paper into a new capital-adequacy regime for Sipps resulting in a list of ‘standard’ assets, with the suggestion that Sipps holding ‘non-standard’ assets – those that could take longer to transfer – would require more capital than those holding just standard assets.
This list of standard assets was updated this August to include UK commercial property, physical gold bullion and national savings and investment products.
But while this shows the regulator is open to consultation from the industry, it has made it clear it will still be watching the Sipp industry closely.
Dear CEO
In July it issued a ‘Dear CEO’ letter, in which it drew attention to its third thematic review, which had focused on the due-diligence procedures of Sipp operators used to assess non-standard investments.
But the regulator warned that “during our review, we found that a significant number of Sipp operators are still failing to manage these risks and ensure consumers are protected appropriately, in spite of our recent guidance. In our view, the failings we identified put UK consumers’ pension savings at considerable risk, particularly from scams and pension fraud.”
It pointed out it had already “required several firms to limit their business as part of our thematic review and in some cases have initiated enforcement investigations”.
“Where firms fail to meet our expectations and continue to put UK consumer outcomes at risk, we will take further action,” the FCA added.
With the pension reforms not scheduled to be enforced for another four months, there is still time for investors to explore the opportunities provided by Sipps, provided they undertake the required due diligence.
Rachel Vahey, independent pension consultant, says: “Generally, these are exciting times for pensions, including Sipps. The biggest regulatory change is, of course, the retirement changes coming about in April 2015, and these offer plentiful opportunities for Sipps. More people will be wanting to take advantage of drawdown – in particular as the rules on taxation on death have been changed – and will want to take control of their own investments in retirement. The prospect is positive for both large provider Sipps, and the smaller bespoke offerings.”
Checking up
But she notes the FCA is still taking a keen interest in Sipps following the thematic review, adding, “it’s obvious that it intends to check up on companies and ensure changes are made so companies manage risks better, particularly on non-standard investments and prudential rules”.
While the Autumn Statement didn’t provide anything unexpected on the pension front, there are still issues to be decided around the retirement guidance. Furthermore, the next few months in the lead up to April is likely to feature the launch of numerous investment products targeting the at-retirement market.
With the FCA having already pointed out it had seen “an increase in the number of opaque investment structures” entering Sipps, it is clear that understanding the underlying investments, both in standard and non-standard assets, will be crucial as we enter 2015.
Ms Vahey adds: “There are still grey areas surrounding definitions of investment and areas where Sipp providers are calling for clarification – for example, on commercial property. Hopefully, the FCA will work with Sipp providers to develop this clarity. Before April 2015, everyone needs to be sure of what the rules say, how they work in practice, and how customers can invest for income in their retirement.”
Nyree Stewart is features editor at Investment Adviser
Regulator’s view: findings from thematic review
In its ‘Dear CEO’ letter published in July, the FCA noted: “Our thematic review found that most Sipp operators failed to undertake adequate due diligence on high-risk, speculative and non-standard investments despite being aware of the Financial Services Authority (FSA) guidance originally published in 2012 which clarified our expectations of firm conduct.
“We found that most firms do not have the expertise or resources to assess this type of business, but were still allowing transactions to go ahead. This increases the risk that a pension scheme may become a vehicle for high risk and speculative investments that are not secure assets, many of which could be scams. It is not acceptable for firms to put consumers at risk this way.”
Particular issues were highlighted in the review, including firms failing to:
• Understand the nature of an investment, especially contracts for rights to future income, and sale and repurchase agreements
• Check that money was being paid to legitimate businesses, and
• To independently verify that assets were real and secure, or that investment schemes operated as claimed.
The FCA also “found that, typically, firms had difficulty completing due diligence for non-standard overseas investment schemes where firms did not have access to local-qualified legal professionals or accountants”.
It also highlighted other issues such as:
• Firms having difficulty establishing where money was being sent, and whether underlying investment propositions were genuine.
• Many Sipp operators accepted investments into their schemes without adequate consideration of how investments could be valued or realised.
• Many firms continued to rely on marketing and promotional material produced by investment providers as part of due-diligence processes, in spite of previous guidance highlighting the need for independent assessment of investments.
Sipp standard assets
Below is a list of assets the FCA regards as ‘standard’ assets to be held by a Sipp that will not incur additional costs to transfer should the pension scheme wind-up:
• Bank account deposits
• Cash
• Cash funds
• Corporate bonds
• Exchange-traded commodities
• Government and local authority bonds and other fixed interest stocks
• Physical gold bullion
• Investment notes (structured products)
• Shares in investment trusts
• Managed pension funds
• National Savings and investment products
• Permanent interest bearing shares
• Real estate investment trusts
Shares listed on:
• Alternative Investment Market
• London Stock Exchange, or
• A recognised overseas investment exchange
• UK commercial property
• Units in regulated collective investment schemes
