Making high-risk investments in single assets as niche as forestry in Australia, residential property in the US and a holiday home in the Caribbean ultimately led investors winning a multi-million-pound case.
And the saga continues, as Carey Pensions awaits judgement on a High Court case around due diligence – which could subsequently create further ripples in the Sipp market.
However, the problems that have beset Sipps could have been avoided, as Keith Churchouse, director at Chapters Financial observes: “What is sad about Sipps is that they have been polluted by investing into assets that were never liquid or appropriate.
"This was motivated by greed and commission on the part of the adviser, and also on the part of the investor, who might have been unrealistic in their expectations.”
What is sad about Sipps is that they have been polluted by investing into assets that were never liquid or appropriate Keith Churchouse, Chapters FinancialHe adds: “The age-old adage still stands – if it looks too good to be true, it usually is.”
And it was never necessary for investors to stake their pension on just one risky asset in the first place.
Alistair McQueen, head of savings and retirement at Aviva, says: “Most Sipp platforms present the customer – or their adviser – with thousands of investment choices.
"And most customers – or their adviser – will choose a portfolio of investment options to diversify their investment risks. Few will hold all their investments in one basket.”
So, what kind of investments are worth investing in Sipps and is there still scope to invest beyond the mainstream asset classes, without landing in trouble?
Crackdowns and lockdowns
Investing in more unusual assets is far less likely than before, according to Jeannie Boyle, executive director and financial planner at EQ Investors: “The Berkeley Burke case made the Sipp administrators responsible for carrying out due diligence on investments made by individuals.
“This has effectively removed the ability of individuals to use their pensions for some of the more exotic investments that are permitted.”
Carl Lamb, compliance director at Smith & Pinching agrees that more exotic options are disappearing, as he says: “Nearly all providers have locked this down, so there’s no more investing in African oil-palm plantations, for example.
"The regulator is cracking down and providers are scared of potential liabilities and problems with getting professional indemnity insurance.”
John Spink, head of financial planning at Drewberry also believes that the market for more exotic asset classes has shrunk, commenting: “Providers are much more cautious about what they offer.”
In addition, Mr. Spink points out that non-standard Sipp investments have created the risk of a ‘double whammy’ for some investors: “There has been a rise in taking out Sipps on the back of DB transfers, so there has been a double risk for people doing the DB transfer, and putting it in something non-mainstream.”
Avoidance of riskier, non-mainstream investments is reflected in LV=’s view of the more ‘exotic’ Sipp investments.
Jacqui Thompson, Sipp and strategic partnerships product manager says: “There are several non-standard investments available on the market, but this is not an investment area we support.”
Bricks and mortar
There is a wide range of mainstream investments available to investors who want to make effective use of a Sipp, including deposit accounts with banks and building societies; shares quoted on a recognised UK or overseas stock exchange; and gilts, to name but a few.
However, one of the distinguishing features of a Sipp is that it allows the investor the opportunity to invest in bricks and mortar − one of the more popular reasons for investing in a Sipp.
It allows business owners to buy the premises that they run their business from, such as offices, factories, pubs and shops.
However, property investment into a Sipp is limited to the commercial variety; residential property cannot be included unless it is through a collective investment such as a REIT.
HMRC is strict about the rules and if it decides that an investment has crossed the line, the Sipp investor could find themselves reeling from the shock of a 55 per cent tax bill.
They are worth considering for tax reasons, though, as Mr. Spink says: “Lots of people who invest in Sipps invest in commercial property. It can be very tax-efficient if you’re self-employed and buying your own premises.”
Mr. Lamb agrees “I deal with a lot of farmers and business owners,” says Mr. Lamb: “And commercial property and land are popular Sipp investments with these clients.”
Commercial-property Sipps can also be worthwhile for protecting family wealth, says Ms. Boyle: The pension-freedom rules have made Sipps more attractive to high-net-worth investors looking to use them to transfer wealth down through the generations.
"In these cases, where liquidity is less of a priority, investing in commercial property can work well.”
Investing in commercial property through a Sipp has its disadvantages too, though, to weigh up, as Mr. Spink explains: “While they are good for tax planning, they can be expensive.
"There can be ‘hidden’ costs, too, such as building-maintenance costs and they can be illiquid.”
But, despite the scams, losses, legal cases, misuse and potential downsides, Sipps remain a valid investment vehicle of choice for many investors, including businesspeople and families simply seeking a tax-efficient way to manage their finances and save for their pensions.
As Mr. Churchouse sums it up: “Sipps still have their place and always will, if handled correctly.”
