Given the various to-ing and fro-ing in the trade media at the moment with many companies and organisations debating SIPP’s and who should be ‘responsible’ for which component of the SIPP ‘mix’, a timely reminder of what SIPP’s are all about from Stadia Trustees below.
Stadia Trustees’ Tony Hales explains the priorities for scheme members investing in self-invested personal pensions.
Self-invested personal pension schemes (SIPPS) enable the individual pension scheme member to determine the investment placement of their pension funds. What does this mean in reality?
The HM Revenue & Customs (HMRC) Registered Pension Scheme Manual (RPSM) provides guidance regarding allowable investments, taxation of such investments and in some case, states limitations for investments.
RPSM 07101010 states that the “…tax regime will impose few restrictions on the type of asset schemes can invest in, although there will be tax charges in relation to certain types of investment… there will also be tax consequences for investing in taxable property.
There will be a single set of investment rules for tax purposes…although schemes will… remain subject to any relevant… Financial Services Authority or other general restrictions outside tax law.”
So in theory, almost anything is allowable, providing it is structured and sold appropriately to a suitable investor. But what do we mean by a ‘suitable investor’? Many investors have historically held pension monies within equities, deposit accounts and bonds.
Yet in recent years we have seen the equity market fall significantly in value, rally and fall again and a number of our banks have needed financial support from the government, or more specifically, the taxpayer.
Given the understandable loss in confidence regarding such investments, it is easy to see why investors are looking for alternatives in the hope of receiving a better return on their investment.
Where does the buck stop?
While the SIPP is self-invested, RPSM also states that “general tax law requires trustees to act prudently, conscientiously and honestly when making decision in respect of the scheme.
Trustees should at all times act in the best interests of scheme members in their capacity as trustees.” Does this effectively mean the trustees of a scheme can tell a scheme member they are not an appropriate person for a particular investment? Or should the trustees educate the scheme member to ensure they have sufficient data to make an informed choice?
Investment advisers, discretionary or otherwise, have for several years talked about diversification, but does the general SIPP scheme member know what this means?
Does the general SIPP scheme member know about correlation and non-correlation between asset classes and how using non-correlated funds can help to reduce the volatility of a portfolio and potentially increase the returns?
Diversification is about more than simply placing monies in different investments. If I invest in five different technology funds, I have still invested all my money in technology funds – is this really diversification? There are a wide variety of different asset classes available to invest in and commensurate risks attached to each one.
While these implicit risks cannot be avoided, they can be mitigated by diversifying part of the overall investment portfolio.
Diversification means spreading one’s investments over a wide range of asset classes and different sectors. By spreading the investment, it is possible to avoid the risk that the investment portfolio becomes overly reliant on the performance of one particular asset.
The key to diversification is selecting assets that behave in different ways. It is also important to diversify across different “styles” of investing – such as growth or value investing – as well as across different sizes of companies, different sectors and geographic regions.
Attitude to risk
In addition to diversification the scheme member needs to consider risk, both in respect of their attitude to it and understanding the risks associated with a particular investment.
Some of the risks may include market fluctuations, liquidity, currency, volatility, financial integrity and robustness of the investment provider, capital loss and geographical risk.
By mixing styles that can outperform or underperform in different economic conditions, the overall risk rating of the investment portfolio is reduced. Picking the right mix depends on the individual’s risk profile – it is essential therefore for the scheme member to choose an investment portfolio commensurate with their attitude to investment risk and that is appropriate for their circumstances and requirements.
Does this mean that all unregulated and alternative or esoteric investments are not appropriate for the average SIPP scheme member? No, of course not. It simply means product providers (both investment and SIPP) and trustees need to ensure the scheme member has the information necessary to make an informed decision, whether or not they employ the services of an independent financial adviser.
Unfortunately, a number of alternative investments have received bad press recently, with the FSA determining them to be unregulated collective investment schemes (UCIS) when the provider, following receipt of legal opinion, has been marketing the investment as a non-collective investment scheme.
This is likely to affect more investment opportunities going forwards, and investment providers looking for longevity within the pension market may subsequently find it prudent to look at alternative investment structures, such as funds regulated by the FSA or other regulatory authorities.