Changes to SIPP Statutory Money Purchase Illustrations

Changes in the assumptions used in statutory money purchase illustrations (SMPIs) have been made by the Financial Reporting Council meaning SIPP members may see changes to the projected benefits at their selected retirement date. Here we explain what the changes are, why they've been made and other key issues for advisers and clients.

Every year, eligible Self-Invested Personal Pension (SIPP) clients receive a written illustration from their SIPP provider. These illustrations are called 'Statutory Money Purchase Illustrations' - or SMPIs for short.

The layout and contents of SMPIs are overseen by an organisation called the Financial Reporting Council (FRC). Recently, the FRC published new requirements for SMPIs, which take effect from 1 October 2023. 

Broadly speaking, these new requirements specify new assumptions and methods to be used by SIPP providers like BW, when calculating the future value of benefits within SMPIs. 

Importantly, these changes do not impact illustrations for SIPPs that are already in drawdown. 

What changes to SMPIs are being introduced from 1 October 2023?

Firstly, changes to the assumptions made as to how benefits are taken by the SIPP member at the point of accessing their SIPP fund. 

It is assumed that:

• the member will not take any tax-free cash; and
• they will purchase a lifetime annuity with the SIPP fund on the following basis:
  • Single Life with no surviving spouse’s benefits;
  • No annual income increases; and
  • A five-year guaranteed payment period.

Secondly, changes to the approach for determining ‘accumulation growth rates’:

• The accumulation growth rate applied to each investment must be determined according to the ‘volatility group’ assigned to that investment; and
• These volatility groups are derived from the volatility of each investment over the last five years.

More information on the determination of volatility groups and the associated accumulation growth rates is shown below.

How are volatility groups determined and what are the associated accumulation growth rates?

The FRC requirements state that the accumulation growth rate that is applied to each investment held in a member’s SIPP, must be determined by that investment’s volatility group.

The volatility group that is applied for each investment is determined by calculating the volatility of that investment, by assessing the monthly investment returns achieved over a five-year period.

Each investment is then assigned to one of four volatility groups - and their associated accumulation growth rate -  in the following way:

What if volatility cannot be determined?

Where volatility cannot be determined, either for a pooled fund, or where the assets are invested other than in pooled funds, that portion of the current SIPP fund should typically be assigned to volatility group three. 

The FRC state that it would be reasonable for SIPP providers to use this group in the following circumstances:

• For unlisted assets - including direct investment in property, or private debt;
• For investments made by a fund manager on a non-pooled basis (for example, by a discretionary fund manager);
• For pooled funds where a fund manager or third-party platform provider is unable to provide sufficient data to determine the fund’s 5-year monthly volatility; or
• For individual stocks selected by the SIPP Member.

What is the impact of these changes for SIPP members?

There should be no impact on a member’s benefits - or the stated current fund value of their SIPP.

However, the changes may have an impact on what the projected value of the SIPP will be worth at the member’s selected retirement date, and the level of annual income this value may provide. 

This could mean that, when a member receives their next SMPI, some could see a notable change in the projected benefits, when compared with SMPIs from previous years.

"The changes may have an impact on what the projected value of the SIPP will be worth at the member’s selected retirement date, and the level of annual income this value may provide."

Potentially, the biggest impact will come from the standardisation in the assumption on how the member will take their benefits at retirement. 

The size of the impact will depend on what preferences the member had previously indicated; for example, whether they were intending to take a tax-free lump sum from their SIPP fund.

In addition, the changes to the approach for determining accumulation growth rates will also impact projections.

As stated above, there will be no changes to illustrations for drawdown projections. 

Some members may see that for certain investments, different accumulation growth rates are used for ‘crystallised’ benefits, compared with the accumulation growth rates that are used for ‘uncrystallised’ benefits.

What approach is being adopted by Barnett Waddingham?

We have amended our illustration systems to reflect the above changes. This will ensure that all relevant SMPIs produced on or after 1 October 2023 will be compliant with the new FRC regulations and guidance. 

Where volatility information is available, we have determined the correct volatility group and associated accumulation growth rate for each investment. 

Where this information is not available, however, volatility group three, (with an accumulation growth rate of 5% a year), will be applied. The exception to this is for cash investments, where volatility group one, (with an accumulation growth rate of 1% a year), will be applied instead. 

We have also added text to the SMPI to let our SIPP members know there may be changes from the basis that we used for their previous SMPIs - and to explain why there will be differences in the assumptions used for crystallised and uncrystallised holdings.  

If you need further information, please contact your Client Manager, or email sipp@barnett-waddingham.co.uk