Creating a new SIPP

  • December 06, 2018
 

Anthony Smith considers his recent experiences of setting up new SIPP schemes.

 

The first question I’m often asked is ‘what is a SIPP?’ Created in the late 80s the first SIPPs were introduced by life companies and I worked with Sun Life on SSASs when they introduced one of the first SIPPs. A simple extension from a single provider’s insured funds to one that included unit trusts from a wider range of fund houses. In answer to the question SIPPs were an extension from a single provider to one that enabled investment in a wider asset universe. In the 1980s this was aimed at the new shareholding generation and the property boom.

It was not until 1990 that James Hay introduced what was known as a so-called ‘true SIPP’ which included commercial property. Still operated through a life company it was followed by many small independent providers some of whom fell into difficulties and fraud leading eventually to the regulation of personal pension schemes in 2007 by the FSA. 

As we fast forward almost 30 years the nature of a SIPP fits very well on a platform which is designed to provide investments of multiple product providers in one place. However, like many of the smaller providers some of these platforms made the mistake of not keeping an eye on the asset universe and allowed non-standard assets that turned sour and have led to SIPP companies closing down or being taken over and merged together. 

It is worth reading the RPPD which is based on a TCF paper from 2007 when SIPPs were first regulated and requires product providers and distributors to ensure the fair treatment of customers in every part of the distribution chain. SIPP providers would have been wise to have heeded this advice as should platform operators when providing a wider asset universe to retail clients.

Having worked on launching a number of new life company sponsored platforms it has been my advice to utilise the life company to operate the SIPP. If the life company is to remain open to new business, then it makes sense to use it as the life company usually has all the relevant permissions to operate a personal pension plan. Not only that but insurance business is exempt from VAT and therefore none of the administration of the SIPP will be subject to VAT and in-house models can also be provided without charging VAT. In addition, the capital requirements for producing new business are generally better and past losses can be offset against the costs of setting up the product; in the case of a new platform that can mean most of the platform set-up costs are offset against tax.

Of course, most platforms and SIPP providers do not have the benefit of piggy backing onto a useful life company, so an investment SIPP must be set up using investment permissions through an IFPRU firm. Stand-alone SIPPs have their own lower capital requirements, which are now subject to additions for non-standard assets. The key ingredient is to have experienced pension staff even if the business is outsourced to an experienced administration firm.

Another challenge that often comes up is the question of compensation if something goes wrong.  With a SIPP the compensation limits generally rest on the scheme relevant to the underlying assets. Even for life companies the FSCS website suggests that claims can be made based on the underlying assets e.g. the depositor’s protection scheme for bank accounts. However, a life insurer is not an eligible claimant and assets are linked to a policy of insurance but the FSCS seem to be comfortable that provided you can see through to the underlying member of the scheme then the trustee of the personal pension scheme can make a claim on member’s behalf despite the apparent contradiction in the rules.

Last but not least legal advice is generally inevitable as the scheme is likely to need a trust deed and scheme rules that need to be water tight along with suitable terms and conditions. All of which the FCA is likely to require before granting permission to operate.

Written by Anthony Smith

Anthony Smith is a Fellow of the Chartered Insurance Institute (FCII), Associate of the Personal Finance Society (APFS), and Chartered Insurance Practitioner

Anthony has extensive experience working with many leading financial services firms from investment firms to life and pensions, mortgages and general insurance, and he is the Director of AJS Consultancy Services.  He has worked with a number of firms setting up new investment companies and with leading platform providers to ensure compliant CASS processes including changing a bank into a pure investment firm with client money.  Anthony has led a number of Part IV applications for platform providers and developed platform strategies for RDR and direct to customer propositions, as well as acting as interim head of risk and compliance.  He has also worked with the offshore industry in Dublin and on many strategic compliance projects.

Anthony has also developed a number of Risk and Compliance Solutions with Mettis based in Cape Town, south Africa.

To find out more about AJS Consultancy Services click here, or find Anthony on LinkedIn.

 

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