PensionsOct 1 2015

Sipps: Make or break

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Sipps: Make or break

The biggest news in pensions over the past decade has undoubtedly been the freedoms that came into effect in April.

Previous surveys in the lead up to the change in legislation have not been able to look into how the changes have directly affected the market. But early indications suggest the self-invested personal pension (Sipp) has been relatively unharmed thus far.

The year ahead is set to be busy for Sipp providers with many changes coming into force. Last year, the FCA’s ‘Dear CEO’ letter to operators suggested most failed to undertake adequate due diligence on non-standard assets. Since then the PS14/12 paper – which unveiled a new capital framework for providers – also added new assets onto the standard asset list, including relatively illiquid areas such as UK commercial property, physical gold bullion as well as liquid National Savings & Investments products, and bank account deposits – although it should be noted there is no official FCA definition of what constitutes a ‘liquid’ asset.

Alongside this, requirements mean providers will have to hold a minimum £20,000 in reserve by September 2016. See Box 1 for more details on how operators must calculate their capital adequacy.

While this goes on in the background, the pension freedoms have been capturing headlines and have been a main focus for the industry over the past year, and now we are starting to see the effects.

Claire Trott, director and head of pensions technical at Talbot & Muir, says the issues surrounding the pensions freedoms are quite significant, but most of the impact falls on the client. “Sipps have been operating these kinds of benefits for many years. Clients struggle with the taxation of benefits.

“Where they are looking to access those benefits all in one go, they will have to wait for the end of the tax year to have an adjustment or refund, or they will need to complete forms in order to get a refund of the overpaid tax sooner.”

Line of defence

One of the other issues is with regards to the second line of defence, where Ms Trott says clients “quite rightly” have to be informed of all the issues when taking benefits for the first time after April 2015, where an adviser does not facilitate the process. “This can mean a delay in the time it takes to access their cash and income,” she adds. “We have had little push back on this but for those with smaller pots and what they deem to be simpler products, it can feel like providers are trying to stop them accessing their money.”

The first since the pension freedoms, this year’s survey covers 67 plans across 50 providers. This is down slightly from April’s survey, which covered 71 plans over 51 providers.

There are a few notable absences in this year’s survey, such as Avalon, which is no longer taking any new business, Tilney BestInvest, which did not have the time to complete the survey and Prudential, which did not return the survey in time. Money Management sends out the surveys with as much time as possible and hopes to see each company return next year for April’s survey.

The Tables in this year’s survey are slightly different, and in a different order, hoping to make it easier for advisers to use. This year’s Table 1 looks into charges, possibly the first element an adviser will look at. Overall, initial charges and annual management charges have not changed over the past six months since April’s survey.

Charges for transferring in and out are also documented in the Table. Starting from the top, it shows @Sipp has increased transfer out charges in its Collective and Solo Sipps to £400 from £100 and £250 respectively.

Rowanmoor has also raised fees slightly with a transfer out starting from £300 rather than April’s £255. Reasons for raising transfer out costs can simply be put down to the pension freedoms earlier this year. As more people are emptying pension pots, providers can use it to their advantage and it would not be a surprise to see more Sipp operators increase this fee in future years. While looking at costs, this can also include different options in retirement. Table A looks into retirement options available and other charges associated.

Transaction charges throughout the years do not typically increase massively, and this year’s survey shows that. New to the Table this year is a look into in specie charges and non-standard asset fees. In specie charges tend to be among the smaller print within a Sipp prospectus.

It is important not to get caught out by any charges, and this Table shows the charges differ hugely, from many providers not having in specie charges, to Curtis Banks’ maximum £500, Westerby charges go up to £880, while the highest maximum in specie transfer comes from Hornbuckle with a £1,000 fee.

While many charges are subject to VAT, some providers include it within their quoted fees. This is illustrated in the Table. Non-standard assets have long been a tricky issue with Sipp operators, and the debate over standard and non-standard assets is sure to continue well past September 2016. As with in specie charges, the costs associated with standard and non-standard assets varies hugely. This will also depend on whether a provider has chosen to classify commercial property as a non-standard asset or not, so it is difficult to compare costs over these two columns.

Commercial advantage

Property will long be an issue for many providers, but the fact that you can invest in commercial property is one of the biggest selling points of a Sipp. Table 2 has been brought into the magazine from online. Changing again from the previous version of the Table, it looks into the number of properties the provider has, how many are in hotel rooms, UK properties, overseas properties or land holdings.

It also illustrates whether a provider allows certain types of property. The Table also looks at basic charges for holding commercial property and whether or not it insists on its own solicitor, property manager or block insurance.

Across all the survey respondents, there is a total of 22,072 properties within Sipps, although not every provider disclosed the type of property. James Hay’s Modular iSipp holds the highest number of properties, 4,379, however it does not disclose the type of property held. It can be assumed there are no overseas properties as this is the only type of property not allowed within its scheme. Rowanmoor follows with 3,209 and Hornbuckle with 3,000 properties.

The average property value across all respondents that allow commercial property sits at £269,790, with the highest from Carey Pensions (£722,462) and the lowest from Rowanmoor (£52,961), although many did not disclose the average. Table B details charges associated with commercial property for each firm.

By this time next year, Sipp providers will have undergone the regulator’s changes to Sipp capital adequacy requirements. Last August, the FCA announced providers would need to hold at least £20,000 in reserve by September 2016. These requirements do not impact life companies as they have separate requirements. More can be seen in Box 1.

It should also be kept in mind that Table 3 only represents an example of capital adequacy rather than exact figures, as it is not yet a firm requirement. So companies must not be disregarded yet as, come September, it will be a regulatory necessity. One reason some operators might not meet the requirements is that it is not a current regulatory requirement to keep money aside, so there is no need to.

Cash levels

Robert Graves, head of pensions technical services at Rowanmoor, says the requirements will have a greater impact on smaller providers, more so for those offering a traditional Sipp service proposition with a wide investment choice including non-standard investments.

“This is because the capital adequacy rules require the Sipp operator to hold a higher level of cash where non-standard assets are held in clients’ Sipp portfolios.”

“Where existing Sipp firms already have exposure to a high level of non-standard investments, continuing to allow further investment into non-standard investments will not be prohibitive, whereas those Sipp firms with little or no exposure to non-standard investments will see a marked increase in the required amount of capital adequacy. This could be prohibitive and polarise the Sipp market – between Sipp operators who will only accept standard investments, and those which continue to offer the traditional full Sipp investment opportunities.”

Talbot & Muir’s Ms Trott adds, “There will still be some small or unprepared providers who will be looking to exit the market before September 2016. For those that do decide to stay, they have no option but to meet the requirements and clients should find this of some comfort. It won’t, however, stop companies from failing but should prevent clients being left high and dry should the worst happen because there should be sufficient capital for a sensible wind-up or takeover.”

Elaine Turtle, director of technical service at DP Pensions and Amps (Association of Member-directed Pension Schemes) committee member, believes most providers (large or small) will have decided whether they are staying in the market or are going to sell or consolidate. “If staying, most have decided based on the indications from the FCA what investments they are going to allow and then, based on that, they know what funds they need and have that in place. It is annoying that those who are not affected by these new rules seem to be the ones with the most to say in regards to them.”

Sticking point

Property has long been the biggest sticking point with providers. There is no doubt the debate will continue beyond September 2016. Many providers have suggested that property is too illiquid to be considered a standard asset, and that the regulatory completion time of 30 days is not enough for a property purchase to go through.

However, Chris Smeaton, director of commercial and strategy at James Hay, says commercial property should not be viewed as an esoteric investment, nor should it form part of the risk calculations for capital adequacy. “Although complex to administer, commercial property has been the backbone of the Sipp industry since inception and has caused little concern over the years. If one Sipp provider goes out of business, it simply comes down to the cost of transferring it from one arrangement to another and that is not particularly costly.”

Keeping with standard assets, Table 4 looks into which assets are not allowed. Previously, the Table showed which assets are allowed, but it should be assumed that all providers will accept standard investments, so this year we asked which are not allowed within a scheme. Further information on the plan’s bank accounts, providers and rates can be found in Table C.

The Table shows that not many assets are rejected, but physical gold bullion is not accepted by the majority of providers. It also shows which providers do not accept UK commercial property as an asset within schemes. This year, we asked whether providers would continue to accept non-standard investments after 1 September 2016. While the majority said yes, a third of respondents are either not accepting or did not disclose whether they will or not.

Industry growth

Table 5 is similar to previous years, it looks at business levels and illustrates growth within the industry. From a glance at the Table, it looks as though the number of Sipps set up has fallen dramatically from April’s 149,348 figure to this year’s 83,955.

However, it should be noted that in April’s survey, Standard Life reported figures for all of its Sipps (64,837), rather than just the Active Money Sipp it has reported on in this survey (4,724).

The figure for both years (excluding Standard Life) tells a different story. The number has dropped, but not by anywhere near as much as before. The numbers for April would show 87,511 (rather than 149,348) and this survey would show 79,231 (rather than 83,955) – a slightly more realistic drop. It should, however, be noted that there are many non-disclosed figures.

The number that does stand out is the total Sipps lost. It was to be expected after the pension freedoms came into action in April, but whether or not it was expected to this extent in Sipps is another story. For this survey, we asked operators for the reason for the closures to make it clearer.

For example, one firm may have lost 2,000 Sipps, but this could just be due to death or it being empty. As it was the first time we asked for reasons, it is no surprise the amount of non-disclosed figures. However, looking at the Table it shows that (of the providers who returned this detail), transfers out were the biggest reason for closed Sipps. We hope that next April’s survey will see more disclosures from providers so advisers can get a better idea of why Sipps are being closed.

Increased plans

While the number of Sipps being set up has dropped within the past few surveys, the number of total plans is still rising. Last year’s overall figure for fully invested and insured plans was 701,822, while this year it is 848,870, a 20 per cent jump, which demonstrates Sipps are still growing in popularity.

The total value in force has grown with the number of plans – but by just 2 per cent to £127bn, with an average Sipp value of £242,994, 6 per cent higher than April.

Table 6 is very similar to April’s survey, giving an overview of all providers who returned a survey and their available plans. The main details have barely changed on April’s survey, but it now also includes whether or not the firm has received any external assessment or accreditation of service standards.

This could be an external award, such as Defaqto’s Sipp Star Rating service, or any internal assessments the operator goes through. With any profession, service is key to keeping customers, so assessments can be vital for a smaller firm trying to help build its reputation.

Direct-to-consumer

An area to consider in the future, as people gain more access to their pension pots, is direct-to-consumer Sipps.

Ms Trott says Sipps are generally complex products – especially with regards to all the options now available at retirement. “If you take the retirement benefits out of the equation, there are some restricted investment offerings that are more suited towards the DIY investor. Sipps are not all about the investments and clients should always be sure they understand the contract they are signing up to, and the charges they will be expected to pay.”

“Large numbers of deals or an increasing fund value could see clients paying more than they expect in a so-called low-cost Sipp because they aren’t using it as intended by the provider.”

Ms Turtle says that, although there are still lots of clients who wish to go directly to Sipp providers, rules that are being put in place are there to protect the clients. “There are various times when clients do need advice and should seek advice especially now with the new pension freedoms. Certain investments like property do tend to have clients dealing direct with providers.”

But Martin Tilley, director of pensions technical at Dentons, believes it is still possible for a provider to accept a client direct, without an adviser, but this is based on being able to caveat exactly what services the provider is offering.

He says, “The client needs to accept responsibility for their actions when they have come to a Sipp provider directly, and not hide behind claims management firms and the Ombudsman if things go wrong. In this respect, client’s accountability needs to be stepped up and enforced if direct client business is to continue.”

The year ahead

The next 12 months look set to be interesting for the Sipp industry, as providers prepare for the capital adequacy deadline. Jeff Steedman, head of business development at Xafinity, predicts the Sipp and small self-administered scheme (Ssas) markets will undergo some mergers and acquisitions in the build up to September, and there is definitely a space for the bespoke providers. “This may include the sale of part of a Sipp provider’s client bank, so there will be acquisition opportunities – but only if the valuation of the business is realistic and the risks within the business are manageable.”

There is still a way to go before September, but full impact of the pensions freedoms on Sipps is already being noted (particularly by the rise in number of Sipps being closed over the past 12 months). And whether or not the talk of mergers and acquisitions that has been suggested within the past few years will come to fruition remains to be seen.

While there is still work to be done for some providers, the next year will no doubt be an eventful one.