SIPPDec 5 2019

Warning sounded on rise of Woodford in-specie transfers

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Warning sounded on rise of Woodford in-specie transfers

Advisers who are seeking to release value from clients’ suspended Woodford fund holdings by carrying out in-specie transfers have been warned of the potential costs involved.

The suspension of the Woodford Equity Income fund in June has left clients that hold the investment in their pension unable to sell it. But some advisers have been raising cash by conducting an in-specie transfer into a self-invested personal pension or small self-administered scheme.

Both Sipps and Ssas are permitted to borrow funds, with the maximum borrowing figure set at 50 per cent of the net asset value in the pension wrapper, minus any outstanding borrowing.

Therefore, if the suspended fund can be moved into a Sipp or Ssas through an in-specie transfer its value can be used in the borrowing calculation.

Stephen McPhillips, technical sales director at Dentons Pension Management, said he was seeing evidence of these transfers taking place.

But he warned an in-specie transfer may not always be a viable choice for some individuals due to the potential costs and timings.

Mr McPhillips said: “Given the potential costs and timeframes, the decision on whether or not to transfer a suspended fund in-specie is likely to boil down to the client’s specific investment needs within the Sipp or Ssas.

“At Dentons, we are seeing some evidence of this happening and being actively considered by advisers and clients. However, we are also seeing examples of clients leaving the suspended fund behind and transferring only liquid cash across to new Sipps and Ssas.

“This, of course, relies on the transferring scheme being able to accommodate a ‘partial transfer’ and also its willingness to hold only a suspended fund in the arrangement.

“Advisers and clients are also likely to consider the cost of holding that suspended fund in isolation in the transferring scheme, as opposed to the costs of consolidating it into the new arrangement – for example, will there be an issue of double-charging for two separate pension arrangements?”

Mr McPhilips said charges for an in-specie transfer could be “far more than” double or treble the cost of a cash transfer.

He said this was because of the “significant difference” in the amount of work required.

Mr McPhilips said: “It follows, therefore, that for a modest fund value to be re-registered, the costs of doing so might render it economically unviable as an exercise in isolation.

“However, if the in-specie transfer makes a potential property purchase viable, for example, some clients might decide to proceed with the transfer despite the costs involved, because it enables them to achieve their wider investment goals.”

Neil Woodford’s £3bn Equity Income fund was suspended in June after experiencing a sustained period of outflows.

When it could not meet the requested redemptions, the fund was gated and investors trapped inside.

The portfolio was once touted to re-open this month, but instead its administrator, Link Fund Solutions, announced in October that it would be shut permanently, with investors expected to lose more than 30 per cent of their assets.

Due to this, some pension holders may find they are short of cash to make investments or purchases using their pension.

If the suspended fund value is £100,000 and is transferred in-specie into a Sipp or Ssas it will increase the maximum borrowing figure by £50,000.

This increase in borrowing could allow a client to make a purchase.

But for this to be viable, both the transferring and receiving schemes need to be able to accommodate the in-specie transfer of the fund and the fund must be capable of being valued. If the client is fully crystallised, partial transfers are not permitted.

William Burrows, retirement director at Better Retirement, told Financial Adviser he is currently considering an in-specie transfer for a client invested in the Woodford fund.

But he has warned that such a move may not always be the best solution.

Mr Burrows said: “A transfer is only in the client’s best interest if there is a clear advantage in meeting their needs. In many cases, the best solutions are also the simplest so care must be taken if a transfer is being made for complex reasons.”

Meanwhile, Tim Morris, independent financial adviser at Russell & Co, said that he would be cautious when advising clients on this option due to the possibility of them investing in commercial property.

Mr Morris said: “Fortunately, I moved the few clients I had invested in the Woodford fund out more than 18 months ago. Not that I foresaw the extent of the troubles back then.

“However, I would be reluctant to advise on the commercial property option, unless they were a business owner and sophisticated investor.

“I appreciate that could be seen as unwilling to help them, yet the damage has already been done in this scenario. It would very much be taking action after the horse has bolted.”

amy.austin@ft.com

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