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For example, data from the Association
of British Insurers shows single premium
SIPP sales, including both new business
and pension transfers, increased 243
per cent year-on-year in the first
quarter of 2007.
Last
year the regulator conducted a small
thermatic review of SIPP advice and
in its September 2007 newsletter to
financial advisers sent out a clear
warning.
The FSA said it was worried about
the potential risk that “SIPP
recommendations may be based on access
to a broader range of packaged investment
funds than under their previous arrangements,
rather than because the SIPP provides
self-selection of actual investment
assets”.
The FSA says if the client is only
interested in a broader range of packaged
investment funds then there are many
stakeholder or personal pensions available
at potentially a lower cost. So, if
the client is in this category cost
will be a major differentiator, although
not the only one.
Industry figures show less than 10
per cent of insurance company SIPPs
are invested outside the insurer’s
fund and further explain why the FSA
is shining a light in this area of
advice. Figures from Scottish Life
from 2007 show that many rivals are
charging more for their SIPP than
their personal pension product.
New business figures for some of
the major pension providers in 2007
show huge quantities of personal pension
business is being turned into SIPP.
For example, Standard Life’s
individual SIPP sales grew by 24 per
cent to £4,538m in 2007, compared
with £3,651m the previous year.
The
question the FSA is asking at the
moment, and the question advisers
and providers need to answer to, is
can the sale or transfer be justified
in terms of meeting the individual
needs of the client?
In the September newsletter the FSA
warned advisers must make proper cost
comparisons with personal and stakeholder
pensions that take full account of
the impact of all charges. The FSA
points out its RU64 rule- whereby
an adviser must document reasons why
a personal pension plan is at least
as suitable as stakeholder- applies
equally to SIPPs.
The FSA is currently undertaking
further detailed thematic work into
SIPP advice which will include visits
to IFA firms this year. Many in the
industry believe arguments around
SIPP charges have in the past been
too simplistic and not enough focus
has been given to the true cost of
the product to the client.
Standard Life head of pensions policy
John Lawson is one such individual.
He says much of the controversy has
stemmed from the belief that SIPPs
are automatically more expensive than
personal pensions. He points out that
the charges on a Standard Life SIPP
are lower than many stakeholder pensions.
Comparisons between SIPP charges
are also more complicated than some
might have you believe. Skandia head
of marketing Billy Mackay says one
of the biggest mistakes made around
SIPPs is failing to consider the overall
effect of the charging structure and
associated benefits of the product.
He warns advisers that individual
charges must not be seen in isolation.
For example, different combinations
of initial charge, annual charge and
monthly charges may suit individual
clients whilst producing the same
growth rate after charges. The effect
of different charging arrangements
for switching funds within the SIPP
must also be considered.
The development of deferred SIPPs,
or pseudo-SIPPs, is one that the advisers
need to be aware of. The terms are
used loosely but usually refer to
personal pensions which have the ability
to transform into a fully-blown SIPP-
and stages in-between- depending on
the individual needs of the client.
Again the choice can be complex with
charges increasing as the SIPP develops
and again these charges and flexibilities
must fit the needs of the client.
Where SIPPs come into there own is
around the investment flexibilities-
despite well publicised roll backs
from the Government around residential
property and exotic investments.
For many high-net worth clients freedoms
like the ability to invest directly
in shares or commercial property,
gear their investments or receive
income drawdown through an alternatively
secured pension, will justify the
advice to move into a SIPP.
So, advisers must ensure SIPP advice
they give is clear, transparent and
focused on the individual needs of
the client to ensure they steer clear
of future misselling claims. This
includes assessing the full impact
on the investment pot of all charges
associated with the SIPP as well as
the investment flexibilities, remuneration
structure and service requirements
that are needed for the client’s
tailored circumstances.
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