SIPP regulation is supposed to increase confidence and professionalism in the pensions industry and with the operation of all personal pension schemes regulated for the first time this is exactly what this should achieve, even if a number of smaller SIPP providers stop operating and are acquired by larger firms.
But maybe now it’s time to highlight one of the practical issues that SIPP regulation brings with it.
Although the new SIPP rules will mean the provision of key features and illustrations - most of the major SIPP providers will have been supplying advisers and clients with these documents as a matter of course.
There is, however, one change which advisers and clients need to be aware of - the introduction of cancellation notices for new business and pension transfers.
A simple rule to implement?
On the surface this looks like a simple rule for SIPP providers to implement – and the industry will be saying: that’s easy I’ll send in my client’s SIPP application to their chosen SIPP provider - tell them to invest my client’s pension monies and pay the unsecured pension benefits selected. Most Financial Advisers will be working on the assumption that their client will receive a cancellation notice and all their instructions will be implemented as soon as the application is set up.
But this will not be the case. The FSA rules require that on cancellation, the SIPP provider should put the client back into their original position. This means that if the client has put £100,000 into their SIPP by transferring in previous pensions and then cancels – the original pension schemes must receive the £100,000 back, not for example £83,000 because the funds were invested and the markets fell.
This means that for many SIPP providers a new SIPP application form will be held until the cancellation period expires before any investments, or benefits, are paid to ensure that the client will receive back the exact amount of funds put into the SIPP should they cancel. SIPP providers will simply not be willing to pay for any deficits from their own accounts given the average SIPP fund value is usually well in excess of £100,000.
But this is not really how the SIPP world operates
We know our clients choose SIPPs for two reasons - they can control their pension investments and can take their benefits when they want to once they reach normal minimum pension age. Waiting a month before they can take control of their pension funds in the way they want to will, be unacceptable to most.
Then there is the added consideration – many SIPP clients set up a SIPP to consolidate multiple different pension schemes into one plan – but for each separate pension transfer received after the additional SIPP application form, there will usually be a separate cancellation notice for each transfer, as this is regarded as a separate transaction.
SIPP providers will have mechanisms in place to record which funds are in their cancellation period and which are outside of it and can be used for investing, but for clients and advisers keeping track of the funds you can/can’t invest in will be an added consideration.
A glimmer of hope
Amongst all the rules on cancellation rights for SIPP, there is a glimmer of hope – there is another FSA rule which means that a SIPP client can request that a SIPP provider completes the transaction before the end of the cancellation period, provided the client is made aware he will lose his right to cancel and he understands the implications of doing this. If this request is received - known as a ‘waiver’ – the SIPP provider will be able to go ahead and invest the client’s funds and pay benefits for those monies which are in their cancellation period.
So, if you’re an adviser that has SIPP clients with a company that will be regulated for the first time from 6 April 2007, you may want to check the cancellation notice section of the new SIPP Key Features you receive, to find out exactly when your clients’ monies can be invested, or used to pay benefits.
For more information about SIPPs, please contact James Hay
Find out more about James Hay’s SIPP product range
