Self-invested personal pensions this week came under the radar of the Financial Services Authority, meaning that, for the first time, holders of these schemes have the reassurance of formal regulatory protection and financial redress in the event of mis-selling.
The government announced last April that the City watchdog would start regulating Sipps from April 2007. The move coincided with rapid growth in the Sipp market as the new, more generous pension contribution limits fuelled demand for more flexible pension schemes.
The past year has seen a huge increase in the amount of money being funnelled into Sipps. Investors can now pay in their entire salaries up to an annual cap, currently set at £225,000.
But until this week takers of these pension schemes have had to tolerate little transparency in terms of charging structures and performance data and no formal compensation procedure in the event of their Sipp provider going bust.
Now that Sipps are being regulated by the FSA, consumers will enjoy the same level of protection as investors in any other personal pension scheme.
“This basically rubber stamps Sipps as a proper regulated product,” says Mike Morrisson, pensions strategy manager at Winterthur Life.
All except for about 15-20 of the smallest Sipp providers have applied for regulation. The FSA says the main bonus for consumers is greater redress if they have a complaint against their Sipp provider. Sipp investors now have access to the full remit of the Financial Ombudsman Service and the Financial Services Compensation Scheme, which offers payouts if your provider goes bust.
FSA regulation has also brought in new cancellation rules, which mean Sipp providers are obliged to reimburse investors the full amount they have paid in if they change their mind within the first month.
This cancellation period effectively shifts the investment risk to the pension provider for the first month of the contract. So if the value of the client’s investments falls during this time and the client then cancels their contract, the Sipp provider would still have to refund the entire amount that client invested, and absorb any losses itself.
Chris Smeaton, technical manager at James Hay, a Sipp provider, says that firms will therefore delay investing their clients’ money until the end of the cancellation period. This in turn may mean the client misses out on fund growth or a hot investment opportunity in the first month.
For those putting in sizeable lump sums, this could mean that significant investment gains are forsaken.
However, the FSA has brought in a waiver for Sipps, which means that if you do want your funds invested immediately after application you can waive your right to cancel. Obviously if you do this and then change your mind, your provider is no longer obliged to refund your investment.
Smeaton says: “People need to understand what these new rules mean for them. If they want their investment made straight away they have got to request that their Sipp provider waives their right to cancel.”
Other implications of FSA regulation for Sipp customers include a more transparent and consistent breakdown of charges and more frequent valuations of their portfolios.
John Moret, director of sales and marketing at Suffolk Life, says: “More information should be available for customers at the point of sale, and this should be presented in a consistent and comprehensible fashion.”
A full list of the Sipp providers that have applied to the FSA for regulation is available on the regulator’s website, www.fsa.gov.uk.
