Recent successive annual reports from the Financial Services Compensation Scheme have reported increases in the number of claims made and payouts in respect of Sipps.
Indeed, Mark Neale, chief executive of the FSCS, noted in the report, which was issued earlier this year, the increased Sipp activity and said that this was a trend that is set to continue.
“We have, in particular, seen a steady rise in self invested personal pensions-related claims, arising from poor advice to transfer pension savings from sound occupational schemes into Sipps and then to invest in illiquid and risky assets within the Sipp.
“As we have made clear in our communications with the industry, we believe the numbers and costs of complex Sipps-related decisions are likely to rise steeply again during 2015 to 2016.”
What needs to be made clear is that Sipps, as products, are not causing the issues, but the advice to transfer to them or the investments that are then held within them are. These investments have included the weird and wonderful, such as teak plantations in South America, jatropha plantations in Asia, off-plan hotel rooms globally and of course unregulated collective investment schemes. But to understand why these otherwise hugely tax-efficient wrappers have hit the headlines in such a negative way, we have to run right back in history to 1989 when Sipps were born.
Sipps initially were designed for the higher net-worth – perhaps entrepreneurial investor – to give them greater control of the investment of their pension assets. The numbers of Sipps were small, initially, until 1995 when the introduction of income withdrawal extended the period beyond benefit date for the investment and control of assets. At this time, investment was controlled by a HM Revenues and Customs-issued permitted investment list and, due to the relatively admin-intensive nature of the individual assets being acquired, the costs of Sipps relative to conventional pensions were high.
In 2006 however, the HMRC regime changed from that of discretionary approval to that of registered and the permitted investment list was lost. From then onwards, registered pension schemes could invest in virtually anything, albeit with some investments triggering unpalatable tax charges potentially on the member and scheme administrator.
To compound this easing, in 2007 Sipps first fell under the remit of the regulator (at that time the Financial Services Authority) that extended the scope of those that could operate Sipps away from the large insurance company and banking institutions to “anybody who could demonstrate ability”. The number of Sipp operators subsequently rose from around 25 to more than 100 in a short time.
The problem that created was an oversupply of operators who, needing critical mass, could compete for business only on two counts: cost and the flexibility of asset acceptance. With the costs of Sipps reduced and the ability for investments within them expanded, the vultures that created and promoted what have become these toxic assets saw an opportunity that was exploited without check up until the regulator finally got a hold of the animal it had created.
