Graham Muir, Principle of Nottingham based SIPP provider, Talbot & Muir, looks at why it could be dangerous to select a SIPP based purely on the illustrations provided to you by SIPP providers.
From April 2013 it has been incumbent on SIPP Providers to fall into line with Financial Conduct Authority’s requirement to provide Key Features Information (KFI) that clearly discloses:
- Details of the interest paid on client money invested within the scheme
- Whether or not the scheme trustee is retaining any interest and, if so, the amount
- Realisitc growth rates for the underlying assets invested within the SIPP
All good so far…but!
1. Does this create a level playing field amongst all Self-Invested Personal Pension (SIPP) Operators?
2. Are the assumptions being employed realistic?
3. Is there clear disclosure of interest retention by SIPP Operators?
Having reviewed the market place we have uncovered an alarming variance in the way individual Operators have reacted to the FCA’s edict.
Take a simple example of assumed returns on bank deposits. Even the most optimistic investor is unlikely to expect returns in excess of 1.5% in the current climate, yet we have discovered that Providers are quoting rates ranging between 1% and 5%!
Other examples of variances between Provider assumptions were;
- Fixed interest: 3% to 4.5%
- Corporate Bonds: 4% to 5.5%
- Property: 5.5% to 7%
- Mixed portfolio (mid rate): 4% to 6.5%
Why does this matter you may ask?
Put simply, it creates an uneven playing field and may lead to advice being predicated on falsely optimistic and unrealistic assumptions.
For example, if an Adviser has three approved SIPP Operators on their panel and obtains illustrations from each for the same client, then a major distinguishing feature may be the growth assumptions rather than the provider’s own charges – this cannot be right. Are some Advisers selecting their preferred SIPP Provider based solely on which one produces the highest quoted fund value? Are some SIPP Providers being unrealistic in their growth assumptions?
A recent industry survey* of SIPP providers regarding the implementation of the new rules revealed that 25% of respondents felt that they had been selected against where other illustrations show higher rates for the same investments. When asked if they believed that there should be an industry standard for realistic growth rates by asset class, two thirds of respondents replied ‘Yes’.
Transparency of charges is of course welcome but it must surely go hand in glove with realistic assumed growth rates if KFI’s are to be comparable between Providers and therefore have any meaning at all.
*Source : Chambers Townsend Consultancy Limited, September 2013.
About the Author
Graham originally trained as a Chartered Accountant before embarking on a career within the pensions industry. Graham draws upon this experience now when dealing with many of his professional connections and their clients. After six years of working in the SSAS/SIPP administration industry, during which Graham undertook a number of roles ranging from consultancy to discretionary fund management, Graham joined forces with Brian Talbot to establish Talbot & Muir in 1993.