SIPP (Self-Invested Personal Pension) investors could be forgiven for not noticing changes to the rules this month, which will force SIPP providers to disclose more clearly the interest they take from SIPP member’s bank accounts.
Too many investors are unaware that some SIPP providers retain a proportion of the interest on the mandated SIPP account. We therefore welcome the new rules, which will help to make SIPPs more transparent; although they won’t stamp out the practice of SIPP providers retaining interest.
So how does it work?
Every SIPP has a current account, with the bank usually chosen by the SIPP provider themselves. This mandated account is used to receive contributions, pay income and fees, as well as temporarily hold money before investment decisions are made.
In common with our personal current accounts, the SIPP account is not designed to hold large sums of money for prolonged period of time. However, equally in common with our current accounts, many people hold too much cash in the mandated SIPP account, earning little if no interest.
However, at least with our personal current accounts, and indeed any other deposit or savings accounts we hold, we get all of the interest due to us. This isn’t the case with many mandated SIPP current accounts, as many SIPP providers take a cut of what could be paid to the investor; something we believe many SIPP investors are not aware of.
SIPP providers broadly take one of three approaches to the mandated current account:
1. The SIPP provider pays no interest whatsoever on the mandated account, following the introduction of the new rules SIPP investors will now know whether or not this is because the chosen bank are paying no interest, or it is because it is all being retained by the SIPP provider
2. The SIPP provider splits the interest, keeping some themselves and passing the balance on to the investors. There is no hard and fast rule as to the way the interest is split, typically banks pay around 1% on the mandated account, although some larger SIPP providers will get rates higher than that. It is down to the SIPP provider to decide how it is split between the member and themselves; the new rules will be very revealing here
3. The SIPP provider passes all the interest on and retains nothing for themselves
What affect will the new rules have?
We believe forcing SIPP providers to more prominently disclose the amount of interest they retain from the members SIPP bank account is part of a growing drive towards increased transparency and is a positive move.
Ultimately we’d like to see SIPP providers take no interest whatsoever, after all, the interest rightfully belongs to the member. However, with research from MoretoSipps showing that interest from mandated SIPP accounts generates up to 40% of some SIPP provider’s revenues, we realise any move to ban the practice could lead to higher SIPP fees, which would obviously penalise members.
Speaking to Investment Sense, Nigel Bennett of InvestAcc, said: “We have been disclosing payments in our literature for over a year now. We wanted to be clear about these payments and decided to include in our literature some time ago. Ultimately, the client receives a competitive rate of interest, and we use any payment we receive towards banking costs, bank charges are not passed onto members. Bank interest is a relatively small part of our overall income and our minimum cash balance is only £1, clients are not restricted to using the default account with ourselves and may use any other account”.
John Fox, Managing Director, Liberty SIPP, commented: “The new disclosure rules are a victory for the consumer. Whatever you think about the FSA, introducing them was a positive step forward for the SIPP industry.”
Fox continued: “SIPP investors have the right to know whether or not their provider is taking a cut, or all, of the interest paid on their current account. Transparency is key.”
“Like a handful of other SIPP providers, we took the decision to pass on all the interest paid on our clients’ current accounts. We never felt comfortable taking money just because we could and from day one believed that it was not in the interest of the investor.”
“Taking commission without telling the person you are taking it from is not treating customers fairly.”
Alternatives
Of course SIPP investors have a simple solution. Keep as little money as possible in the mandated SIPP account and move any spare capital to other deposit accounts, which pay a higher rate of interest.
The Leeds Building Society currently pays 1.60% on their instant access SIPP deposit account, and National Savings & Investments (NS&I) Income Bonds also pay 1.75% if you are happy for the interest to be paid away each month into the mandated SIPP current account.
Simon Murphy Business Development Manager for the Leeds Building Society said: ”Currently our SIPP deposit accounts are proving popular with investors, and are designed for those looking for a good return on cash held in a SIPP. Apart from the rate on offer we provide a smooth application process and straightforward easy to understand products. Most of all we give peace of mind to SIPP investors who know they are dealing with a financially strong, independent mutual building society that they can trust”
Furthermore if you are prepared to tie up money for a year, a rate of around 2% is achievable. More options can be found on our best buy table for SIPP deposit accounts, which can be found by clicking here.
As the table below shows, it really is worth keeping as little money as possible in the mandated SIPP bank account and moving any spare capital to alternative instant access accounts.
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If you would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email info@investmentsense.co.uk
