How to add esoteric investments

This article is part of
Self-invested Personal Pensions - April 2014

The need and frequency for a financial adviser to consider the inclusion of more adventurous assets within a client’s Sipp portfolio will largely depend on the profile of their client base and their clients’ attitude to risk and reward.

The suitability of a particular investment for any one client is in the domain of the adviser, but in the generality of principles, some exposure to adventurous investments can also be a good strategy.

The adviser needs to pay heed to FCA regulations, in particular the promotional rules regarding non-mainstream pooled investments, which encompass unregulated collective investment schemes (Ucis) and other similar structures. Mindful of the net worth and sophistication of the investor, it is worth noting these can be allowable investments within a Sipp portfolio.

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There are few restrictions on what a Sipp can invest in, however certain investments incur sizeable tax penalties if entered into and therefore by default are deemed as not permitted. This includes investment, directly or indirectly in tangible moveable property and residential property (with a few exceptions), loans to members or anyone connected with them and unquoted shares that do not qualify as a genuinely diverse commercial vehicle.

So aside from those restrictions, there appears to be every opportunity for the adviser to add the more obscure assets to a client’s Sipp portfolio where suitable.

Your choice

That belies the fact that, while there may be many Sipp operators in the marketplace, not all Sipps are equal. A number of Sipp operators provide a Sipp product with choice restricted to only quoted and regulated investments available through a particular platform. Others may allow a broader range of standard investments including the use of stockbroker accounts and investment in commercial property. Where more specialised investments are required, the greater the need to use the services of a bespoke Sipp operator.

Ultimately it is down to every Sipp operator to determine what is allowable, within HM Revenue and Customs (HMRC) defined parameters. Some, for example, may have a blanket rule not to allow any overseas investments. Therefore advisers will need to do their homework even among bespoke Sipp operators as to the acceptability of a particular investment, as each will apply different criteria when assessing whether something is allowable.

Sipp operators should be carrying out extensive due diligence before allowing an investment and this extends beyond simply testing whether it meets HMRC requirements. A factor to consider is that the Sipp operator - through its trustee company - will be the legal owner of the assets and therefore must consider the risks of ownership from its own perspective. This entails ensuring that secure ownership and title to the asset can be obtained and all reasonable steps taken to ensure it is genuine and not a scam.

It must also guard against liability, for example by limiting liability on investments that can go negative such as futures and options. There are administration issues to consider such as ensuring the asset can be properly valued to comply with benefit crystallisation event calculations and reporting. The liquidity of the asset also needs consideration. Just as important as the initial due diligence is the need for ongoing due diligence as it may only be after a period of time that it becomes evident the investment may not be all that it seemed.