As the SIPP industry comes under the regulator's scrutiny, we reveal how to pick the best provider.
A self-invested pension plan (SIPP) gives you the freedom to construct your pension just as you want it without the rigidity attached to using a traditional pension company.
But with greater freedom comes the need for greater care, and with something as important as your retirement planning you should do everything in your power to make sure the SIPP company you use is reputable, trustworthy and has your best interests at heart.
Recently the SIPP industry has come under the regulator's scrutiny after worries that some SIPP operators may be at higher risk of failure.
We asked SIPP expert Gregory Kingston of Suffolk Life to explain what's currently happening in the SIPP market and what investors should do to carry out their own due diligence.
Firstly, what is the regulator concerned about, and should an investor be equally concerned?
For a while now the Financial Conduct Authority (FCA) has been worried that some SIPP operators are at risk of failure and therefore have the potential to cause 'significant consumer detriment'.
Its concerns include: not being able to properly segregate and look after investor money, insufficient controls and processes, inexperience of running a SIPP firm, high concentrations of questionable investments to name but a few. Investors should be concerned too - the FCA's worries are on their behalf.
What action is the FCA taking?
The FCA is taking a number of different steps, one of which is to ensure that SIPP providers keep a good deal more cash in their bank (capital) to protect investors should anything go wrong. Just how much cash they'll need won't be known until September this year.
Financial advisers - and now investors - face a number of problems when sourcing the right provider (commonly termed 'due diligence') - the main being the questions to ask and whether or not the answers are good or bad.
In my opinion, investors should ask the following questions. I've also included what a good response might look like:
1. Who owns the SIPP firm?
Some businesses that do not operate SIPPs as their core activity are now viewing the SIPP market as being too hostile to work in any longer.
They are closing down their SIPP operations, selling to other providers or simply ceasing activity. SIPP operators that have strong, pension-focussed shareholders or backers, and that really do focus on SIPPs could be more attractive.
2. Is it sustainably profitable and financially sound?
It may come as a surprise to some investors to learn that not all SIPP providers are profitable. Sustained, reasonable profitability is good for any firm but is even more crucial for SIPPs at the moment. They need significant investment in order to apply regulatory and legislative improvements and changes. Of course, nobody likes to see excessive profit, but there are only a few examples of that in the SIPP market today.
3. What has its exposure been to some of the toxic UCIS investments so widely reported?
In hindsight investors would have been wise to treat with caution a SIPP provider that accepted virtually any investment offered to it. News of the latest unregulated overseas hotel investment going under is sadly never far away, and SIPP operators that gorged themselves on this sort of business risk going out of business themselves as these investments turn sour.
4. Does it hold sufficient capital?
SIPP providers hold enough capital (cash in the bank) to ensure they can operate just long enough to transfer all their investors away in the event that their firm ceases trading. The current capital requirements are wholly inadequate in many cases, and the FCA wants to raise them significantly.
The initial reaction from some SIPP operators is that they just don't have enough cash to meet the expected level, and so they may need to cease trading or sell their firm.
5. What is its complaint record?
Many SIPPs are about service, so you are justified in arguing about it. How many complaints has the firm had? What's its complaints policy? What proportion can it not agree on and is subsequently sent to the Ombudsman? Don't be scared to ask - it is your money you're asking about.
6. Does it have any experience and pedigree of running a SIPP?
It may seem an odd question, but the management of some SIPP firms - new and old - have little or no experience in running one. When the FCA recently censured the managing director of a SIPP firm they described it as "a "how-not-to" guide of running a Sipp operator". Not the type of leadership you want to entrust your retirement to.
7. Can it offer access to the investments I might need tomorrow as well as today?
Some SIPP firms only offer access to a limited range of investments, and there's nothing wrong with that provided your needs don't change. But make sure that they do offer access to the investments you might want later on, once you've built up your fund. Provided it doesn't cost you any more today it'll save you changing SIPPs in the future.
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch
To drive progress