Withheld interest on Sipp provider cash accounts

He asks whether a client would prefer a Sipp provider that has been able to negotiate an enhanced interest rate of 0.8 per cent with a bank of which it passes on 0.5 per cent to the client and keeps 0.3 per cent (all fully disclosed, of course), or a Sipp provider that passes on the whole of a lower interest rate of 0.4 per cent?

His comments follow revelations by FTAdviser last year over the scale of profits made by some firms from retained cash account interest. Accordung to data compiled by ‘Mr Sipp’ John Moret, one ‘top 10’ firm was making 40 per cent of its profit from withheld interest.

According to a special report published in FTAdviser sister title Money Management last year, of more than 70 Sipps 55 were paying an interest rate less than the current record low 0.5 per cent bank base rate, with around 25 paying zero per cent and a handful paying the base rate or above.

Mr Tilley says: “If a trail can be used to reduce headline fees on which Vat is payable, the client could be saving Vat too.

“I accept there is an issue where Sipp providers are paying zero or only 0.1 per cent a year, for example, as a disproportionate amount is being retained and the client could most probably be disadvantaged in using the default account as probably higher rates are available on instant access elsewhere.

“Unfettered use of alternative accounts should always be available.”

But Neil MacGillivray, head of technical support unit of James Hay, whose firm was among those paying near zero, says there is not an issue with interest charged by Sipp providers on cash accounts.

He says: “These are not savings accounts. They are functional ‘current accounts’ which facilitate transactions into and out of a range of investments.

“We would not expect large amounts of cash to be held in these account as any long-term cash allocation would be invested into our cash panel or cash fund.

“Once the adviser has established the platform needs of a particular client they would look at the overall cost of using one platform over an other and not individual charges in isolation.”

Claire Trott, head of technical support at Talbot & Muir, says Sipp bank accounts should be viewed by advisers and their clients as a current account and the monies held within them should be waiting investment or payment out as an income.

She says: “The rates payable of Sipp default accounts is generally better than a member would be able to negotiate for themselves and for this negotiation the Sipp provider will usually keep some of the interest, based on the total value of monies held by the bank on their behalf.

“It is possible for members to get a better rate by the use of fixed-term deposits and this is where the investment of the cash should be done.

“Alternatively there are usually other bank accounts available with their investment partner should they wish to hold significant funds there before investment.”

Robert Graves, head of pensions technical services at Rowanmoor Group, says advisers should check if fees are dependent upon the value of the assets held within the Sipp and therefore what is being paid for a cash account.

He says: “Provided any cash is held in the designated bank account, or in one of our investment partner’s accounts there are no additional fees charged.

“We do not take a charge based upon the cash value held.”