Sipps situations to beware

Robert Graves, head of pensions technical services at Rowanmoor Group, agrees: “Advisers need to ensure that in advising a client to have a Sipp, that it is the most appropriate product for that client taking into account the intended investment strategy for the pension fund.

“FSA reviews have shown that there is not always sufficient evidence of appropriateness.”

Mr Graves recommends that, with the array of different Sipp operators in the market, advisers must carry out sufficient due diligence on those firms, including the Sipp operator’s due diligence processes involved in accessing the acceptability of investments.

“The adviser though is ultimately responsible for assessing the suitability of the investment and should take appropriate steps in ensuring they meet their regulatory requirements,” he says.

The only rules around advice related to Sipps are around unregulated investment, warns Hyman Wolanski, managing director of Sippchoice. “The FSA is at war on Ucis and all sorts of investment that can only been made in a Sipp.

“Otherwise, as the are no restrictions on investments the issues only arise with the HMRC. If you invest in certain areas the revenue don’t like, then you get taxed. You are not prohibited from investing in those areas but are taxed.”

Mr Graves declares: “Non-standard investments including Ucis can and do form legitimate investments under a Sipp portfolio.

“The FSA’s primary concern is with regard to the promotion of non-standard investments to retail clients and ultimately the suitability of these clients investing pension funds in non-standard investments, given that in general they carry a higher level of risk.”

The FSA has proposed new rules to ensure Sipp providers have more capital in their coffers to absorb potential problems.

If these rules are introduced – in spite of the major opposition to them – it is likely to be a challenge for smaller Sipp operators and especially those that enable commercial property investment to meet the requirements, says Mr Graves.

“Whilst commercial property is a relatively standard type of investment for Sipp firms to handle, from the FSA’s viewpoint it carries the illiquidity risk associated with their definition of non-standard investments,” he says.

Providers will have to increase their charges to stay in the market, warns Mr Wolanski. “It has a cost, so the members are going to have to pay.

“Because of the way the FSA are proposing the rules it will almost certainly force Sipp operators to change their charges from the fixed amount a year to one that’s percentage of the fund because the capital requirement will have regard to the size of the asset.”