As 2017 nears its close, our Self-Invested Pensions Technical Specialist, James Jones-Tinsley, reviews the state of the UK Self-Invested Personal Pension (SIPP) Marketplace and explains five of the hottest issues in 2017 that we, as a leading SIPP provider, have witnessed over the last twelve months;
1. ‘Capital adequacy’ – one year on
The capital adequacy rules have been with us now since September 2016. One of our obligations, as a SIPP provider, is to provide the Financial Conduct Authority (FCA) with capital adequacy data within specific timescales. This includes classifying the ‘standard’ and ‘non-standard’ assets that we hold within our SIPP book of business.
The time, effort and expenditure required to achieve this is completely invisible to SIPP members and advisers. Although SIPP providers may have all the relevant data, extracting it and using it in a way that allows them to compute their capital adequacy position, is only a ‘click of a button’ operation if a lot of clever people firstly build that button!
The most fundamental question of all remains unanswered: is capital adequacy actually adding value to the safety and security of a member’s SIPP fund? In the interests of learning from experience and producing regulation that works for everyone, we would welcome the FCA following up its new regime by carrying out a retrospective cost-benefit analysis and publishing the results. Collecting all the data is one thing; analysing it and drawing conclusions as to its efficacy, is quite another.
2. Over-taxation of ‘pension freedoms’ income payments
Following the introduction of the ‘pension freedoms’ in April 2015, pension income payments are – in theory - taxed at an individual's marginal rate. But where an individual draws a large amount in a single month, they can be taxed at a higher, ‘emergency rate’ of tax.
Individuals who are charged this higher rate can reclaim the overpaid tax from HMRC, by completing and submitting the appropriate claim form.
However, this phenomenon is not confined to the few. For example, in just three months from 1 April to 30 June 2017, HMRC had to repay £26.8 million of overpaid tax from pensions, after it had processed 10,576 tax repayment claim forms. What a monumental waste of time and money!
Even these statistics arguably understate the issue, as many individuals are entitled to a refund, but either don’t realise that they are, or don’t know how to claim*.
In addition, recent statistics from the FCA that speak of many individuals fully withdrawing their pension funds - only to deposit them in taxable, non-interest bearing, current accounts - suggest that individuals trust the deal from their bank more than the permanence of pension rules, which is a very worrying development.
* The relevant claim forms can be accessed here.
"The March 2017 Budget announced that the MPAA would be reduced from £10,000 gross per tax year to £4,000"
3. Defined Benefit pension transfers to SIPPs
The ‘pension freedoms’ have witnessed a surge in transfers from ‘defined benefit’ occupational pension schemes to ‘defined contribution’ (or ‘money purchase’) pension arrangements (like a SIPP), as well as an increase in ‘insistent’ clients; that is, those who are determined to effect the transfer, even where their financial adviser recommends them not to.
For SIPP providers, this has resulted in two dilemmas; firstly, do they accept ‘insistent’ client transfers or not, (Barnett Waddingham don’t, as it would go against a financial adviser’s recommendation not to make the transfer) and secondly, their position at the end of the transfer pipeline often means they first become aware that the ‘cash equivalent’ transfer value (CETV) is coming their way near the end of the CETV’s three-month guarantee period.
Although a recalculation of the transfer value still reflects the cash equivalent value of the individual’s accrued benefits in the ceding scheme, any reduction in comparison to the previous figure will be met with aggravation by the transferee, whose ire will most likely be misdirected at the SIPP provider, as the one who ‘held things up’.
Given the timescales involved, if you are undertaking a defined benefit transfer, you should work closely with your adviser and receiving pension provider, in order to keep delays to a minimum. The increased focus of the FCA on defined benefit transfers, coupled with examples including the recent plight of the steelworkers, offers a salutary warning of another potential misselling scandal in the making; arguably with the ‘pension freedoms’ acting as its catalyst.
4. Money Purchase Annual Allowance (MPAA) – ‘regulatory drag’ once again!
Following a government consultation, the March 2017 Budget announced that the MPAA would be reduced from £10,000 gross per tax year to £4,000 with effect from 6 April 2017; despite the view of a majority of respondents that it should be left untouched.
The snap General Election of June 2017 led to the legislation implementing the reduction to be dropped from the Finance Act 2017; leaving both pension members and their Advisers ‘in limbo’, as to whether the reduction would happen and if so, from what date?
The reduction was reintroduced in the second Finance Bill of 2017, which finally received Royal Assent on 16 November 2017. Somewhat contentiously, the reduction to £4,000 was back-dated to 6 April 2017, even though the primary legislation up to the point of Royal Assent stated that the MPAA was £10,000. Not for the first time in recent years, the enabling legislation post-dated the point of it taking effect; a phenomenon that we refer to as ‘regulatory drag’.
We hope that the change to an Autumn Budget and the time-tabling of future draft Finance Bills will see any changes to pension rules receiving Royal Assent, prior to the date of implementation. Retrospective legislation does not assist sound financial planning and at worst, could be regarded as deliberately pernicious.
5. Acquisitions within the SIPP sector
Increased concentration is a modern-day economic phenomenon throughout the world’s marketplaces, and is not unique to the SIPP industry.
Although we may not have witnessed the frequency of headline-hogging acquisitions and mergers this year, the SIPP marketplace retains ‘a long tail’ of small providers. Achieving economies of scale, (such as our partnership with Interactive Investor this year, to operate their “Investor SIPP” online; against a backdrop of economic upheaval, regulatory change and higher capital requirements, makes consolidation enduringly inevitable.
The most successful SIPP providers will harness the potential of technology; although, very importantly, without sacrificing the quality of its customer service.