But should pension savers be thinking out of the box when it comes to generating as much income as possible for their retirement?
Since the introduction of the self-invested pension plan some 30 years ago, savers have had control over where their retirement savings are invested.
Instead of relying on an insurance company to find suitable assets and produce a regular return, owners of a Sipp had a world of investment opportunity available them.
Since 2016, this investment world has been split into standard and non-standard assets – and savers need to be acutely aware of which they are going to hold in their portfolio.
Standard and non-standard assets
“Essentially, a standard asset is anything that is readily realised within 30 days, easy to get hold of, more likely to be accessible when you want it and at a value you want it to be,” says Eddy Woore, team director, Mattioli Woods.
“Examples are cash bank accounts, regulated unitised funds and shares listed on recognised stock exchanges.”
A standard asset is anything that is readily realised within 30 days Eddy Woore, Mattioli WoodsA non-standard asset, on the other hand, is anything not deemed standard, including illiquid and hard-to-sell items.
“Some non-standard assets are simply longer-term deposits not available within a month, which means they are technically breaching the Financial Conduct Authority’s definition of a standard asset,” says Mr Woore.
“It could arguably also include – because it might not be readily marketable within a month – commercial property, although quite often, the properties can simply be at auction.”
It is these non-standard assets that have hit most of the headlines, mainly for the wrong reasons.
Equity and bond markets go up and down, but esoteric investments are where most of the problems for savers have been found.
“Given the plethora of non-standard investments available for possible Sipp investment over the years, and the inherent risks which can attach to some of these, it is regrettable, but almost inevitable, that some investments have failed,” says Stephen McPhillips, technical sales director at Dentons Pension Management.
“It is natural that only the failed investments come under the spotlight, as answers are sought around the reasons why.”
Several such failed investments have gained media, court and claims management firms' attention over the past few years.
One of the latest events was an appeal brought by Berkeley Burke in late 2018 against a decision from 2014, in which the Financial Ombudsman Service ruled the Sipp provider had to compensate a client after it failed to carry out adviser-style due diligence on his investment.
FCA concerns
“What the FCA in some cases court cases has been concerned about is the higher risk non-standard assets promoted by mostly, but not always, non-regulated introducers, which are facilitated by a Sipp administrator,” says Mr Woore.
“They have been rightly concerned the underlying risks are not being explained to clients, meaning they were being allowed to invest in a regulated pension environment without the appropriate advice.”
For Mr Woore, problems in this area got worse after the introduction of the retail distribution review, which meant after no advisers could charge commission on pension and investment products.
“As a result, a lot of financial advisers had to get requalified and charge the asset under advice fee for managing assets properly in the regulated environment,” he says.
“However, a good proportion of the old-style commission advisers did not become regulated, generating a larger non-standard assets industry of unregulated advisers, who were promoting investments where they could still take large commission and/or fees without being a formally regulated adviser.”
As a result, the FCA – and the courts in some cases – are dealing with the worst excesses of the non-standard industry, he concluded.
However, advisers recognise that not all non-standard investments are distressed or toxic, and the distinction between these and good quality non-standard investments is an important one to make.
“There are still some non-standard assets where the underlying asset can be understood and make sense for the client to invest in at the appropriate level – but this should only be done with the right advice and scrutiny,” says Woore.
For Mr McPhillips, of greater concern to advisers is likely to be the extent to which a provider is exposed to large volumes of business placed into one particular, non-standard investment “and/or the extent to which a provider has relied on unregulated introducers of business to it”.
With all this in mind, an adviser's due diligence of Sipp providers is more critical than ever – and using already well-publicised examples of failures can help this process, too.
“Advisers will undoubtedly look for well-structured and well capitalised businesses, rather than ones which simply offer very low-cost propositions,” says Mr McPhillips. “Low cost can have its own toll on clients and advisers.”
