When choosing a self-invested personal pension (Sipp), it is vital to select the right provider. Getting it wrong usually means no more chances – especially for the investor
So, the Football Association has confirmed Fabio Capello will stay on as England coach, despite the team’s dismal World Cup performance. During the campaign, parts of the media felt his ‘boot camp’ approach was why the team’s performances was at best lacklustre.
The thing is, Capello and quite a few of the England players will get a second chance in four years’ time. If not then, there is always the European Championships in just two years.
When a Sipp provider gets it wrong, there normally is not another chance – at least not for the investor.
The price of Freedom?
As investors with Freedom Sipp experienced as the firm was being slowly wound up last year, it can be a nerve-wracking time. They were unsure if hefty penalising tax charges would be applied to their retirement funds and I am sure some doubted if their Sipps had actually owned the investments they thought they did.
In the end, it was not as bad as the investors feared and Mattioli Woods took over the Sipp book. Nearly six months on, it is quite possible they are still going through the process of examining all the details of who has what and where.
Private equity
When we commissioned research into wider investment options at the end of 2009, we found private equity was high on the list of demands and subsequently decided to implement it as an investment option within our MasterSipp. Taking a naïve marketing perspective, I assumed ‘plugging in’ private equity into an already comprehensive choice of investment options would be a relatively straightforward exercise.
I turned out to be completely misguided. The considerations for holding private equity within a Sipp are extremely onerous. Any investment manager or adviser will want better than satisfactory answers to make sure their clients’ money is being administered in exactly the correct manner. The former investors with Freedom Sipp serve as a good reminder.
The risks
The questions that should be asked are:
Does the Sipp provider have a secure means of safe custody or other custodial arrangements?
It seems a simple requirement. However, consider the implications should deeds go missing or be destroyed are considerable.
What controls does the Sipp provider put in place?
Rules surrounding pensions and private equity are complex, and the penalty for breaching them is potentially a tax charge of up to 70%. They can become even more complex if there are multiple investors within the same Sipp firm all investing in the same asset. Typical controls would be: corporate actions. These need to be processed and passed to all interested parties within a certain deadline. Failing to do so potentially disadvantages the investor, and a claim can be lodged
Can the investment be readily valued or realised?
Investments within pensions require an up to date correct valuation at a number of key events, including:
- Death;
- Additional investment;
- Starting to draw benefits, such as taking income or paying tax-free cash;
- Pension sharing order on divorce.
Using an older valuation could well be a breach of the rules and trigger a tax charge.There is also the consideration of the lifetime Allowance, currently frozen at £1.8m. Investments into private equity are often made because they have huge growth potential. At Suffolk Life the average bespoke Sipp has a fund value of around £275,000 and if some of the larger fund sizes struck it lucky with a good private equity investment, they could easily exceed the allowance.
Does the investment include taxable property?
Not every investment is suitable for a Sipp. Problems arise if the investment is a trading vehicle, and the Sipp investor together with any connected parties (husband and wife, for example, including their pension funds) own in excess of 20% of the equity. In these instances, taxable property charges (up to 70% as well as ongoing taxable property charges on continuing income and capital gains derived from those assets) will be made on any tangible moveable assets with a value of more than £6,000 (think of machinery or a production line) owned by the company.
No investment manager or financial adviser is likely to want to consider all these points all of the time. They would rather conduct their due diligence at outset, and find a Sipp provider that they can really trust to look after the detail when the need arises.
They need to be absolutely sure in their mind their chosen provider will not only know all the rules, but can apply them with adequate controls to bring any risks or requirements to their attention. They do not want to find out by reading in a newspaper about the latest FSA probe of a Sipp provider, so they will put the hard work in at the outset to make sure they are choosing the right one. Just like selecting the right investment, it is likely to repay them dividends in the future.
The end investor is not the only one who suffers if the decision is the wrong one. There is reputational damage to consider as well as a potential financial claim and the loss of a client.
No second chances
Fabio Capello had been meticulous in his planning for the World Cup, but in spite of that, it goes to show there are no guarantees just as with any investment, private equity or other. As the England team has now flown home, it may have not have been down to lack of organisation – at least the team and nation will get another go in four years’ time, and by then we will probably have forgiven them. Get it wrong with your choice of Sipp provider, and your client might not have that long to repair the damage. Nor are they likely to be quite as forgiving.
Greg Kingston, head of marketing, Suffolk Life
