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In The Spotlight: Current Issues in the Self Invested Pension Market

In a new feature, over the coming months, we will be putting different members of our SIPP & SSAS team ‘In the Spotlight’. In the first interview Gillian Bardin and Kerry Houghton comment on current issues affecting the SIPP market.

Let’s start with a look at the most recent change to how SIPP providers will operate. What’s your view of the changes in capital adequacy announced by the Financial Conduct Authority (FCA) in August? Is it a good thing? How will it affect you at Taylor Patterson and your clients?

Gillian Bardin (Managing Director): At last we have a decision which is positive for the sector and for members who will now be able to discuss with their provider the impact of the rules and whether they are committed to the SIPP sector. I don’t think there will be an immediate impact on clients, after all the rules are not in force until 2016, however in the longer term any new regulation changes the marketplace.

Kerry Houghton (Business Development Manager): There are some specific issues too. For example commercial property is obviously a topic close to our heart and the debate over what is ‘standard’ and ‘non-standard’ is one we are following very closely.

Do you think you will treat UK commercial property as a ‘standard’ asset?

Kerry: I think it’s still unclear, we’ve seen different opinions but why would the regulator say that UK commercial property is ‘standard’ and then assume that the majority will be ‘non-standard’? It’s a real debate at the moment especially in relation to the 30 day rule and more clarity is needed.

Is the regulators view that if it can be transferred within 30 days it is ‘standard’ and if not it is ‘non-standard’?

Kerry: Yes.

So it’s then a question of whether a transfer can be successfully completed within 30 days?

Gillian: Yes and at what point does the 30 days start ticking? It’s not clear. There are other complications, for example, where there is an outstanding loan the bank will have to be involved, which in our experience slows things down.

Any other issues from the capital adequacy review?

Gillian: On a positive note, at least we now have a decision and more clarity; although we clearly have questions about certain aspects. There is also an issue in the way the surcharge on ‘non-standard’ assets has been calculated; if you have very little exposure to ‘non-standard’ you end up with a relatively large excess.

Do you think it’s fair that the FCA has built the surcharge on the number of ‘non standard’ assets rather than the value?

Kerry: It’s a difficult one because they have done it in response to some SIPP providers writing down the value of a ‘non-standard’ asset to a £1, but for those providers who have very little exposure it seems unfair. It could lead to issues where we have a relatively large SIPP, say £750,000, with a small amount, for example £20,000, in non-standard assets. In such cases there is plenty of money to pay fees and provide liquidity, but it may cause the investor problems if he or she seeks to transfer their SIPP. Some SIPP providers might be wary about taking on the client due to the impact it will have on their capital adequacy position, for what is a very small investment into a ‘non-standard’ asset for an otherwise excellent SIPP.

What are the unintended consequences of the new rules for SIPP members?

Kerry: More restrictive investment choice is going to be a big thing moving forward, we’ve already seen that starting.

Gillian: I think many of the bespoke SIPP providers are probably going to pull away from anything ‘non-standard’. But is that really a bad thing? I’ve got mixed feelings and it probably should be treated on a case by case basis. We could also see an increase in fees charged to members who want to invest in ‘non-standard’ assets.

So for your average SIPP member, who has shares, funds, maybe commercial property, deposit accounts, do you see anything negative?

Kerry: No, and I think it’s given us some clarity and certainty to the sector.

Are we heading towards a permitted investment list or is this a defaqto permitted list?

Kerry: We are in favour of a permitted investment list, but I think this is as close as we’re going to get; we just don’t see HMRC or the FCA coming out with a list.

What effect will the final rules have on Taylor Patterson’s capital adequacy requirements?

Gillian: We’ve always more capital set aside than we actually need and can already meet the new requirements, which is a great position to be in.

Let’s talk about the Budget, what’s your view? Have the proposed changes in retirement gone too far?

Kerry: Because we tend to deal with high net worth members it’s great news, but I am nervous that people who have relatively small pensions might be tempted to take large lump sums. I’m also worried that people could spend their pension, for example to help their children get onto the property ladder, without thinking about their own future income needs. However, we’ve got some experience of clients in Flexible Drawdown already, where most people have taken a sustainable level of income and didn’t ‘raid’ their pension pot. Since Flexible Drawdown has been in place we’ve only actually had one member, who has taken the whole fund, which I might add was done for the right reasons.

Gillian: In the high net worth space we don’t see members stripping out their funds, but at a lower level we are concerned. We’re also concerned that people in valuable defined benefit schemes might be tempted into transferring their pension just to take advantage of the new rules, when we all know this is unlikely to be in their best interests.

Do you think the new rules will give pensions a boost?

Kerry: Yes, we’ve already had people change their views on pensions. Accountants in particular, who have often been quite cynical about pensions, are changing their views. Those people who were previously anti pensions have had many of their arguments blown away.

Gillian: It’s the increased flexibility; people now perceive that they can have access to their pension when and how they want it, meaning we’ve had a lot of people coming to us now wanting to talk about pensions. Kerry: We also believe that entrepreneurs, who previously found pensions too restrictive, might now be more interested in pensions under the new rules.

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