Trouble ahead as Sipps swerve FCA savings rate rule

Trouble ahead as Sipps swerve FCA savings rate rule

Self-invested personal pension (Sipp) providers have been let off the hook of having to introduce a basic savings rate in their cash accounts, sparking criticism among pension specialists.

Last week (25 July) the Financial Conduct Authority (FCA) proposed the introduction of a single, basic savings rate for all longstanding customers with cash savings.

The regulator's goal is for banks to set a higher basic savings rate for their less active customers than they currently do.

However, this new rule, if introduced, won't be applied to the Sipp market, the FCA revealed to FTAdviser.

Abraham Okusanya, principal at research firm FinalytiQ, accused the regulator of having double standards.

He said: "The FCA policy here is incoherent and damaging to clients. When it comes to treatment of cash in Sipps and platforms, the FCA has put the industry interest ahead of the clients."

Many Sipp investors will have part of their pension held in cash – either because they are already drawing a pension and need a regular monthly income or because they a reserve to take advantage of future investments opportunities.

However, a wide variance exists in the amount of interest payments Sipp providers take from investors' cash holdings, which in 2016 varied from nil to 1 per cent.

A majority of providers take an element of interest trail, known as 'interest turn', which is the money Sipp providers earn from interest paid by banks on customers' cash holdings with the Sipp.

Mr Abraham said: "My view is that Sipps and platforms should not be allowed to cream interest off clients saving.

"Sipps and platforms should negotiate the best rate that they can, as part of their service, but all the interest should be passed on to clients."

John Moret, principal at consultancy business MoretoSipps, wouldn't go as far as accusing the regulator of having double standards.

But he said the decision not to force Sipp providers to pay investors better rates of interest on their cash accounts from was "going to cause some problems in the future, when investors compare the rates they are receiving on their personal accounts and cash Isas with the rates paid on their Sipp cash."

He said: "I suspect over time that Sipp providers will come under pressure to improve their terms – but most will only be able to afford to do that if they can renegotiate the bulk terms that they receive from their chosen bank."

Other market specialists agree with the regulator's decision to allow Sipp cash accounts to be excluded from proposed cash savings rates rules.

Martin Tilley, director of technical services at Dentons, said in a Sipp, funds cannot be "withdrawn until age 55 and then in a prescribed benefit manner".

Tom Selby, senior analyst at AJ Bell, also argued that cash accounts offered by banks and holding cash savings within a Sipp aren't comparable.

He said: "Specifically, Sipps don't have introductory interest rates which revert to lower rates after set periods of time, and that is what the FCA is trying to address with the basic savings rate.