Royal Bank of Scotland is cutting the interest payable on self-invested personal pension linked bank accounts to zero by next March, in a move which appears linked to the implementation of EU banking capital rules.
A letter from RBS - seen by FTAdviser - to a Sipp firm, which asked to remain anonymous, laid out the revised pricing arrangements, explaining that for all scheme accounts the interest payable will move from the exiting level of 0.25 per cent above the Bank of England base rate of 0.50 per cent to just 0.1 per cent below the base rate.
Then from 1 March 2016 a further change will apply and the new rate of interest will be 0 per cent.
The letter adds the interest payable may be subject to change in the future.
This complete removal of interest on Sipp accounts comes at the same time that the Basel III banking requirements come into force.
A spokeswoman for RBS said that the rate cut was a purely commercial decision and would comment no further.
As FTAdviser reported back in February, these changes to international banking rules could pile pressure onto banks to change account rates, leading to an increase in self-invested pension fees, as profits linked to retained interest are placed at risk.
Some Sipp providers withhold bank interest and only pass on a portion to clients.
This reduces the amount clients receive in interest, but in some cases rates remain above average, despite the provider retaining a portion of the amount paid by the bank.
Some providers are thought to make up to 40 per cent of their profits from retained account interest.
John Fox, managing director of Liberty Sipp, told FTAdviser that a loss of interest on Sipp accounts will hit some providers harder than others, particularly with the timing set so close to next year’s capital adequacy rules for Sipp administrators.
“It is going to be quite the double whammy, this is a large source of income being removed and many will be forced to increase fees for customers, while a lack of interest on cash holdings will really impact those in drawdown.”
He added these changes are likely to go for all banks, some of which may be forced to start charging for such accounts, as few will be making any money from them because of the amount of capital they need to hold against their Sipp businesses.
The European Banking Authority’s new rules state that any money banks hold on deposit will have to be matched with liquid assets that could cover the deposits within a 30-day period.
Mr Fox pointed out that the picture is muddied by the question of whether this sort of bank account should be considered corporate or retail.
The Prudential Regulation Authority has yet to make a clear ruling, but if they are deemed to be corporate accounts, they fall within the remit of Basel III, while if retail, they do not.
Andy Leggett, head of Sipp business development at Barnett Waddingham, said that although headline Bank of England base rate remains static, the rates paid on accounts are generally falling.
“Generally, banks don’t really want cash from Sipps due to the way new rules say they have to treat the money for their capital reserves. It is perverse, as cash in Sipps intuitively seems a stabilising force within the overall system.
“The rate that our bank pays on the trustee bank account is about to fall - although it does still pay above zero - and we have had to notify advisers and members.”
His firm tried to counteract this to some degree by adding more options to their banking panel for those wanting to hold cash for the medium term as part of their overall investment strategy.
Claire Trott, director and head of pensions technical at Talbot and Muir, stated that she has not seen a reduction in the interest paid and they pass on a “significant amount” of this to the member.
“There are many stories out at the moment talking about why providers may need to increase their actual fees to clients, although I don’t think we have seen this across the industry yet. That said it may still come and those that have raised these issues are likely to be some of the first to do so.”
Anna Hopkinson, group marketing manager at Rowanmoor, added that the interest on bank accounts held at their designated bank, Metro Bank, is currently payable at 0.5 per cent a year and there are no plans in place for this to change.
