Advisers concerned by tenfold surge in Sipp use

Data obtained from the Association of British Insurers by FTAdviser showed there were only 150,319 Sipps sold in 2011 compared with 1.7m in 2015, as numbers surged last year post-pension freedoms from 607,744 in 2014; although they had already been increasing at a steady pace.

Advisers have reported an increase in clients asking for Sipps, even when more conventional pension products would suit their needs, with many IFAs raising concerns about clients becoming more vulnerable to fraud.

Sam Caunt, director of Northamptonshire-based Moerae Life Financial Planning, said his firm rarely recommended Sipps but now clients are asking for them on a regular basis.

He said: “What we are now finding is there are people where we have recommended a low-cost retirement wrap, but someone has said they want a Sipp even though they don’t need one.

“I don’t know what benefits people see in them. Maybe their neighbours have a Sipp for some good reason, so there is a certain cachet about them at the moment.”

Scott Gallacher, a financial adviser with Leicester-based Rowley Turton, said he was concerned because while Sipps are not a problem as a wrapper, he said there are people who use them for “questionable investments”, leading him to call for further investigation by the regulator.

He said: “It has always been the case that clients come in thinking they need a Sipp, and in most cases they don’t. There has been a change in the market where Sipps have become more mainstream.”

Earlier this month, the Financial Services Compensation Scheme revealed it had paid out £77m in claims relating to Sipps.

The scheme’s annual report showed it continued to see a high volume of claims involving advice given by financial advisers to invest in Sipps and to hold within them investments in high-risk, non-standard asset classes, which have often become illiquid.

Just this week, the Financial Ombudsman Service’s first quarter statistics showed Sipp complaints had the highest uphold rate of any product.

There were 427 enquiries about Sipps between April and June, making them the 29th most complained about product, with 66 per cent of the 328 complaints about Sipps being upheld.

Meanwhile, the Financial Conduct Authority stated it was looking at the issue of regulated providers offering unregulated products - such as investments in Sipps - after concerns were raised.

Greg Kingston, head of communications at Suffolk Life, said Sipps have always had a certain cachet, one that was likely boosted by the possibility of them being able to invest in residential property last decade.

He said: “I don’t see that as leading to greater risk of fraud, when all the evidence points to the Sipp being right at the end of a process during which investors are lured in by promises of high investment returns or the prospect of owning hotel rooms in Buenos Aires.”

Doug Ryan, wealth management director at Mattioli Woods, said the danger with Sipps becoming more mainstream is not all providers offer the same quality of service.

He said: “In terms of fraud, the low cost providers that profess to be able to allow for total flexibility often fall short in terms of process and operational integrity, as we continue to see many of these providers fall into trouble,” he stated, adding: “I feel this is set to continue especially as we approach the change in rules around capital adequacy.”

Sipps in their original form were designed to be highly bespoke pension structures allowing for total flexibility within HMRC rules, but this is no longer the case, he said, with some classified as Sipps even if they are in reality much like a personal pension.

Martin Tilley, director of technical services at Dentons, added recent rule changes had meant Sipp providers had to take some responsibility for investments which would reduce the possibility of fraud.

He said: “Those Sipp providers who continue to accept esoteric investments are now responsible for the assets they accept into their book.”