How do you know if a SIPP investment is suitable – what do you need to think about?
When looking at the suitability of investments, historically, most self-invested personal pension (SIPP) providers’ due diligence involves looking at compliance with pension scheme legislation.
Therefore, they would be focusing on areas not suitable for SIPP investment in general, such as residential property and connected loans. It is also important to ensure commerciality where there is any connection between the SIPP member and the investment or investment provider.
Now, while these areas remain absolutely key, of course, it is becoming clear many SIPP providers have not been extending suitability considerations to individual client circumstances. Therefore, once an investment is deemed to fall within permissible pension regulations, there seems to be very little – or indeed any – individual consideration.
It’s clear to see that – to ensure suitability – SIPP providers (like we do at Mattioli Woods) look at not only the investment itself, but the suitability for each individual client, typically taking into account factors such as:
What to do if you find yourself in a bad investment?
- the investor’s previous investment experience and expertise
- a portion of their SIPP and wider wealth to be invested
- any fixed sources of income
- timescales to retirement (particularly with illiquid investments)
- source of business: e.g. has there been input from a regulated financial adviser? And how did the investor come across the proposed investment?
It can be difficult for investors to identify at any early stage whether an investment is not as expected or promised. Indeed, implausibly strong or consistent investment returns are some of the hallmarks of investments that are not as they seem, such as Ponzi schemes.
By contrast, the majority of investment classes will suffer fluctuations in performance over the short to medium term, so – opposite to what investors may think – this is not necessarily a cause for concern. Therefore, if in doubt, an investor’s first port of call should be to seek advice from a regulated financial adviser. A regulated adviser will be able to not only review the investment itself but also the ongoing suitability for a particular investor, and therefore whether they should continue to hold or seek to exit.
Given the string of providers going bust, is there a future for SIPPs? And how can providers survive?
There is undoubtedly a strong future for the SIPP market, which has already evolved in view of recent developments and case law. Plus, it is worth noting that cases involving unsuitable and unregulated investments are only a very small proportion of the overall market.
The main issue is that SIPPs were designed to provide more investment flexibility compared to traditional insurance company arrangements. However, this can be a double-edged sword, where investors do not take suitable advice or have sufficient experience and knowledge themselves. However, for those individuals seeking to consolidate pensions and gain access to a wider range of investment opportunities by either utilising their own experience or going through regulated advisers or fund managers, a SIPP remains a particularly strong choice. This is particularly pronounced for business owners and those wishing to hold commercial property through their pension schemes.
With recent compensation and court cases where SIPP providers have been deemed to have a duty of care towards members, we have seen a divergence in the SIPP market whereby the majority have chosen to restrict flexibility to core-regulated investment offerings, while others – such as Mattioli Woods – continue to offer full flexibility, and have increased regulatory due diligence and capital adequacy responsibilities.
Is the Liberty SIPP issue (around unregulated investments) a sign of wider issues in the SIPP market?
Along with previous similar situations where several SIPP providers have ceased to trade as a result, this particular topic is certainly symptomatic of the issues in the wider SIPP market. To a certain extent, the market has already evolved, with smaller providers having been acquired. As highlighted above, this has led to a polarisation of the SIPP market, with the majority of providers focusing on low-cost and less flexible options. However, other providers in the marketplace, like Mattioli Woods, still continue to provide the full flexibility originally intended for SIPPs, and, to do so, we (and others) have to consider suitability not only for investments but also on an individual basis for each client. We/they will also be subjected to increased capital adequacy regulations to protect investors.
Ultimately, much comes down to the ethos of the business. Many of the SIPP providers involved in difficulties around non-standard investments had taken a large number of new SIPPs very quickly by accepting business from unregulated introducers. This allowed the SIPP books to grow very quickly, but at the expense of any detailed understanding of the SIPP investors’ individual circumstances and, in some cases, a lack of understanding of the investments held within the SIPP book.
At Mattioli Woods, we continue to believe advice and planning for clients comes first, with a SIPP providing a powerful planning tool for some clients. However, this needs to be paired with a detailed understanding of not only pension scheme planning but wider goals, aspirations and timescales. Combined with ongoing client reviews, this can mitigate the risk of unsuitable investments being held within a SIPP book.