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Better protection for investors

Trevor Law writes "A common feature of the financial press in recent months has been discussion of the regulator’s new guidelines about Self Invested Personal Pensions (SIPPs)".

A common feature of the financial press in recent months has been discussion of the regulator’s new guidelines about Self Invested Personal Pensions (SIPPs).

In November 2012 the Financial Services Authority proposed measures to improve the capital adequacy of SIPP providers in order to protect investors. This has led to a consolidation of the market in advance of the new rules coming into force in 2014, with many large providers acquiring their smaller counterparts.

The new guidelines will increase the operating costs incurred by SIPP providers and are undoubtedly a positive thing. SIPPs were first introduced in 1989 but were not regulated until 2006, meaning that it was not difficult for new providers to start operating.

In October 2012 the FSA published a thematic review of the market and concluded that some providers were putting consumers at risk through a ‘failure to adequately control their business.’ The FSA became the Financial Conduct Authority at the beginning of April and its new rules will rid the market of those providers that cannot meet this higher level of standards. The well established SIPP providers will have no issues in this regard and their product offering will continue to be a viable retirement option for certain individuals.

A SIPP is essentially a defined contribution scheme but offers a wider range of investment options than a standard personal pension. The level of benefits to be drawn upon at retirement is once again dependent on the size of the accumulated fund but SIPP investors can be more creative in building up their pension pots.

There are approximately 200,000 SIPP investors in the UK. They will typically be individuals able to afford a higher level of regular contributions, together with a willingness to take on an increased amount of investment risk.

The additional investment options that differentiate a SIPP from a standard personal pension will typically be higher risk. Whilst this raises the prospect of improved returns and thus a faster rate of fund accumulation, the potential downside risk will also be accentuated. It is important to bear this in mind.

SIPP investors can manage their own investment portfolio or appoint a manager to do the work for them. One of the main benefits of using a SIPP is that it permits direct investment in commercial property.

This may be useful for a self-employed individual and limited companies who could use the SIPP to purchase their business premises. Rent will be payable at commercial rates to the SIPP but can be treated as an allowable business expense to be offset against the profits. Within the SIPP this rent will grow free of both income tax and capital gains tax.

A SIPP also has the ability to borrow money and this could be used to fund a commercial property purchase. An investor may borrow up to 50 per cent of their pension fund’s value.

Therefore a £200,000 pension pot could purchase a £300,000 property if an investor was to use the maximum level of gearing. The only other stipulation is that the funds must be borrowed from a commercially recognised lender such as a bank or building society.

Another possible attraction is that a SIPP is able to hold unlisted shares in both UK and overseas companies. This could be particularly valuable for a private business owner but anyone considering this option needs to be aware that not all shares are suitable.

For example, if you own too much of the company then you might be subject to a large taxable property charge. For those without specific expertise and knowledge it may be worth seeking financial advice in this area.

SIPPs represent the most flexible retirement saving option available and offer some particularly valuable functions for certain individuals. However there are some important factors to consider in the selection of a SIPP provider.

Capital adequacy is important as dealt with earlier. The range of eligible investments will vary between providers and so care must be taken to match this with your individual objectives. SIPPs also tend to carry a higher level of charges than standard personal pensions and so a provider must also be competitive in this regard.

* Trevor Law is a director with Merito Financial Services, chartered financial planners, based in Solihull. E-mail: tilaw@meritofs.com

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