SIPP Conjecture debate: Property, drawdown and the FSA

Leading SIPP experts discuss transparency, possible rule changes and regulatory intervention.

Where do you see the main growth areas for the SIPP market over the coming year?

Mike Morrison: I think the big one without doubt is going to be the at-retirement market. I also think the introduction of flexible and capped drawdown will really bring SIPPs to the fore.

Martin Tilley: I would agree and I think the growth will be in the at-retirement market. We already had a fair degree of flexibility, but the problem we always had at the back end was there was either an annuity purchase or a tax charge on ASP. The introduction of flexible drawdown gives advisers another arrow in the quiver when they're talking to their clients.

Christine Hallett: The only other thing I would add is I think it is a natural extension of the flexibility that SIPPs offer, anyway. In terms of business growth areas, as well as the at-retirement market, I think we'll see a big increase in the corporate market place as well.

Can you see a point at which we might start to see any kind of slowdown in the SIPP market?

Christine Hallett: There is such a wide range of opportunities because of the flexible nature of the rules. It has enabled people to effectively bespoke different propositions for different needs, so I really can't see it slowing down. I think people will seek to improve and increase the opportunities available.
One of the big issues within the market is what exactly constitutes a SIPP. Are we going to see a polarisation starting to occur within the market between specialist providers and some of the lower-cost SIPP providers in the future?

Mike Morrison: I'm not sure it'll be a polarisation. I come very much back to the advice process - that is the key point here and if an individual says my short-term needs are a range of funds, and that pension offers a wide range of funds, then great.
Longer term, they may like to do something with commercial property, discretionary portfolio, private company shares or more esoteric investments. I really see the advice choice at that point is to choose a product that could address the client's needs in the short term, but be flexible enough to open up into the long term.

We've already had a couple of questions in from listeners. The first question is: the borrowing rules for SIPPs are too restrictive and have left some individuals that occupy their SIPP premises for their business stuck and unable to move on, even if they want to expand their business. Do you not think it would be sensible to have these restrictions changed to a more sensible level of borrowing - perhaps 75% on commercial property?

Christine Hallett: Well, I think most SIPP providers would absolutely agree that the ability to increase commercial property borrowing would enable people to get out of some situations. We look to work with people to ease the burden and find solutions. But I think certainly there is a desire from the SIPP community as a whole to do some lobbying.

Mike Morrison: Wearing my AMPS hat and being on the AMPS committee, I think if we had significant demand then it could well be something we could put on our agenda.
We are in regular communication with HMRC and it would be worthwhile testing the water. If people do have real concerns, then make representations through your AMPS representative.

Martin Tilley: I'd like to add my representation to Mike and say yes, we would love you to try that through the AMPS committee.
We think that, certainly, commercial property suffered rather badly through 2008-09 and, to a degree, when the lenders have started to lend SIPPs have been somewhere they've been happy to do so because the gearing is such that you're lending only 33% of value.
However, there are other ways that we can look at perhaps doing this with phased property purchase, joint property purchases with members and companies, and additional transfers in tranches of property coming across as contributions in specie.

Mike Morrison: The other side to this point is when people do enter into a loan to buy a commercial property, they must understand what they are entering into. They are entering into a lease, they are promising to pay back the loan and pay the rent.
From an IFA perspective, I think it's a great chance for proper long-term planning, particularly post-RDR. It's very much fee-chargeable advice about long-term planning and that planning is important.

We've got another question from one of our listeners. It says: it's all well and good clients making large contributions to their pension. However, when clients are informed about the death benefit situation once the -annuity is taken, it tends to get quite a negative response. If they take a drawdown pension, there's a high tax charge on death for the beneficiaries. Is there a solution to this? Wouldn't it be beneficial if surplus funds could be transferred to beneficiaries in their own pension pot?

Christine Hallett: I would support the listener's viewpoint on why not enable the pension surplus to be paid into a beneficiary's pension scheme. I think given the situation with our longevity - in terms of mortality rates, etc. - this country has got an ongoing problem in terms of people planning for their retirement. I've always thought it would be a good idea if, on the death of the main pension member, it could be put into another pension scheme. Surely that has got to assist the long-term retirement issues that this country faces.

Martin Tilley: I think looking at some sort of inheritability would be good. Two points I would make, though, around the death benefit tax charge: one would be there is a bit more of a conundrum now if someone dies in drawdown as the lump sum is taxed at 55%. Next, if a spouse or dependent carries on the drawdown, there's no 55% tax charge, so there may be more scope for a spouse to carry on the drawdown instead of sacrificing 55%.

Before we start the debate up again, I want to start a listener vote. The question is: what percentage of your SIPP clients do you expect to make use of the new flexible drawdown rules? Your first option is more than 75%, the second option is 50%-75%, the third option 25%-50% and the fourth option is less than 25%. So if you can cast your votes on that and we'll come back to that a bit later on during the debate

We've actually got even more questions coming in from our listeners, which is brilliant. Do you think we will ever see rule changes that will allow SIPPs to purchase residential property?

Christine Hallett: The point is that you can purchase residential property, but there's a tax charge. There are various structures as well that invest in a range of residential property opportunities. So there are opportunities to get exposure into the residential asset class through SIPPs.
As for direct investment into the residential properties, I can't actually ever see it coming back on the agenda. I think it was a shame that it was taken off the agenda because there were clearly some opportunities that could have benefited clients and advisers.
However, I think it was a lot of the hype and marketing generally coming from the Spanish residential ‘get your villa in your SIPP'-type opportunities that really highlighted the issues, so I understand why it was withdrawn.

Another question from our listeners: what happens if a client comes direct and says I want to put this investment in my SIPP? It doesn't breach any HMRC rules. Where does the SIPP provider stand - should they be accepting business only if it comes in via an IFA?

Martin Tilley: We always recommend that clients seek financial advice and they act on that financial advice. If they do decide to make an investment of their own choosing, they must accept that some of the responsibility must lie with them.
From a SIPP provider's perspective, it is enormously difficult to vet with the expertise of an investment adviser each individual transaction for each individual member.
I think the question we need to come to here is suitability. What might be suitable for some individuals might not be suitable for others in terms of outright risk.
And for us as a SIPP provider, it is impossible to know the client's personal circumstances without doing a huge fact find - that's not our role. That's the role of the financial adviser.

If I can just bring us on to the results of our listener vote. The question that we asked was: what percentage of your SIPP clients do you expect to make use of the new flexible drawdown rules? The response we got was 20.6% said they expected more than 75% of their SIPP clients to make use of the new flexible drawdown rules. Next, 24% said between 50%-75%. After that, 27.5% said between 25%-50% and finally, 27.5% said less than 25% of their SIPP clients would make use of new flexible drawdown rules

Mike Morrison: Firstly, we are talking SIPP clients, so we are talking people who have got a large enough sum of money to secure that £20,000. Now, when I first saw the flexible drawdown rules, I did wonder a little bit about was it going to be only for people with large sums of money.
Thinking about it more, you realise there are a lot of people who have got deferred benefits from DB schemes - people took enhanced early retirement in the days that DB schemes had money in them.
There are people who have got perhaps significant state benefits that, when added to a deferred benefit of, say, £15,000, will take them above the £20,000 limit.
I think the market is bigger than it appears. Particularly, people have got different sources of income: doctors, dentists, academics, the old [A9] concession - all of those people may find flexible drawdown a viable option.

We have a listener question about publishing service standards and turnaround times. Do you think that this should be compulsory for a complicated product such as a SIPP?

Martin Tilley: I attended an AMPS compliance seminar last October. There were about 50 SIPP providers present and we had an interactive vote. Of the 50 SIPP providers, 12 actually published service standards on their website. But of those 12, only one published the results of whether or not they were actually meeting them.
I'm not actually a great fan of service targets unless you can prove that you are delivering them. If you're not actually publishing the results, I think they're not worth the paper they're written on.
What I would prefer to suggest is something that we have done - that is apply for external accreditation through one of the bodies. The one that we use is Investors in Customers, where they actually survey your client base and come back with the results, which we then publish.

Mike Morrison: I would agree with Martin. One of the difficulties with SIPPs is because it is an unbundled product, in many circumstances you're not in control of all the elements of your service standard.
So we've all seen how long it takes some companies to pay transfer values across to a SIPP.
If you're doing a commercial property purchase, you've got the solicitor, the surveyor, the environmental concerns - all of those can be out of your control. So it's a very difficult one to be definitive on, I think.

Should the FSA look to make a distinction between the different kinds of SIPPs on offer?

Martin Tilley: I think they've been asked and I think it's an impossible task, simply because of the variation you have between providers.

Christine Hallett: I think they need to understand, though, that people use these vehicles for a reason and it's about the advice process and getting the right vehicle for that client.

Mike Morrison: I think every SIPP is a personal pension. The question is: is every personal pension a SIPP?
It's about people at the point of taking out the contract understanding what it can and can't do and as Martin said, generally, with financial advice, looking forward to not what they want to do today, what they might want to do in the future.
I can't see anything to be achieved by specifically defining what a SIPP is.

This is an edited transcript of the original debate. Listen to it in full at http://bit.ly/froXqP

Christine Hallett is CEO of Carey Pensions UK
Christine has spent more than 30 years in financial services with blue chip companies. Starting as a clerk at Midland Bank in 1976, she moved to Abbey National in 1978, where she developed her career over 18 years and was promoted to a senior executive. In July 1996, Christine moved to take her first directorship with Pointon York as operations director. She changed the shape and re-positioned the company in her 12 years with them as managing director and CEO. Now at Carey Pensions UK, Christine is dedicated to the delivery of quality service through her team approach

Mike Morrison is head of pensions development at AXA Wealth
In 1990, Mike joined AXA Wealth in its previous guise as Provident Life, then Winterthur, as technical support manager. Prior to this, he was an independent financial adviser at both local and national firms. In his role at AXA Wealth, Mike liaises with various industry bodies with regard to developing pension products and their accessibility to consumers. He also travels around the UK talking to IFAs about pensions. Mike was chairman of the Association of Member Directed Pension Schemes (AMPS) committee in 2007, and has remains on the committee. He is also on the retirement income steering group of the ABI, is an accomplished writer and presenter, and holds an LLM in European Law

Martin Tilley is director of sales & marketing at Dentons Pension Management
Martin qualified as an associate of the Pensions Management Institute in 1984 and has more than 25 years of self-invested pension experience - mostly gained at Dentons, but also through previous roles with Sun Alliance and Crown Financial Management. Martin regularly writes articles for trade and industry publications and speaks on self-invested pensions and industry issues. He also spends time presenting to advisers about opportunities in the specialist pension market. He was formerly a SIPP Adviser award winner