Having worked in the world of SIPPs since they were launched in 1990, I have got used to the ups and downs of pensions taxation and regulation.
However, I believe the reforms proposed in the 2024 Autumn Budget in relation to IHT on pensions savings, taken together with the changes under discussion in the FCA paper DP 24/3, potentially represent some of the biggest upheavals to the SIPP market over the last 35 years.
It is easy to dismiss the SIPP market as a minor blot on the pensions landscape, but nothing could be further from the truth.
Recent FCA figures published last November suggest that total SIPP assets may well now exceed £600bn – close to 20% of the total assets of UK pension schemes. One can debate whether many of today’s SIPPs are really what Nigel Lawson had in mind when he encouraged wider range investments, but more of that later.
Aside from the practical issues arising from the IHT proposals, which have been well aired elsewhere, I am concerned about a number of implications should the proposals be adopted:
- The retrospective impact is a very worrying aspect. Do not think that this impact will be confined to the wealthy. Someone who took out a SIPP in 1990 and has saved £10,000 a year would, with conservative growth assumptions, have accumulated a fund in excess of £1,000,000, which ignores tax relief on contributions. To introduce measures that could see that fund dramatically reduced on death seems unfair and unjustified.
- The inequity of the proposals between DC and DB pensions savers also seems unfair. I write as someone whose main pensions income is derived from a DB scheme. Not only will the proposals swing the balance back towards DB pensions but as a result many public-sector scheme members will be unaffected by these changes.
- The risk of a tsunami of FOS claims against advisers and providers from disadvantaged investors, arguing that the risk of adverse IHT changes was not taken into account in advice and other pre-sales marketing, particularly post-pension freedoms.
- The likelihood of significant disinvestment between now and 2027, when the new proposals are due to be adopted. This could severely dent the revenues that the Treasury have used to justify the new tax.
As an aside, I am surprised that the Government, to date, appears to have ignored the significant SIPP assets in their search for investment growth. Why not, for example, encourage some investment from SIPPs into private markets and other infrastructure investments in return for some IHT concessions?
I believe the reforms in the 2024 Autumn Budget represent some of the biggest upheavals to the SIPP market over the last 35 years
Although the closing date for responses to the discussion paper DP24/3 has passed, it’s worth having a read if you haven’t done so, as the possible changes that are outlined are significant. There is one chapter devoted to SIPPs, but two other chapters on “tools and modellers for existing savers” and “DC pension transfers and consolidation” are also very relevant to SIPPs.
SIPP providers have been hamstrung by regulatory requirements in trying to provide useful projections and illustrations, particularly for SIPP investors approaching decumulation. Encouragingly, there are signs in the paper of an appreciation by the FCA of the benefits of digital tools and modellers.
The FCA are also concerned about the continuing delays with DC pension transfers, albeit that transfer regulations aimed at protecting customers have certainly contributed to those delays.
John Moret: Is this the next big pensions blunder?
Quite rightly, the FCA have raised concerns about the consolidation and transfer of DC pensions, questioning if those transferring fully understand the implications. Some of the newer SIPP providers using digital technology and apps have been targeting customers on a non-advised basis, and it is not clear that those customers are really in a position to make an informed decision about the benefits of transferring.
I cannot get excited about one of the proposals in the SIPP chapter, which suggests introducing a third SIPP product type in addition to the bespoke and streamlined products. This new product type is given the name “ready made” SIPP, which is a SIPP that has access to a limited range of “pre-selected” investment funds. Effectively, this is just a personal pension, so why call it a SIPP?
However, I do get animated about one of the other proposals around ensuring adequate due diligence. Had the regulators addressed this issue some 15 years ago – as they were encouraged to do by many SIPP providers – then most of the calamitous investment failings that have brought down more than 15 providers would have been avoided.
It is to be hoped that none of the changes, when they happen, dent the recent growth pattern
I am not a fan of the latest proposals that suggest setting out detailed rules on due-diligence obligations. The reality is that most SIPP providers now will not accept non-standard investments because of the associated regulatory risks.
Five years ago, I produced a policy paper that suggested a new approach. This would have removed any provider due-diligence requirement for standard investments and would only have allowed providers to accept non-standard investments subject to full due-diligence checks and where the investor was a high-net-worth or sophisticated investor, similar requirements as in the UCIS regime. I still believe this approach would be more beneficial than what is suggested in DP24/3.
So, there is a lot happening in the world of SIPPs and it is to be hoped that none of the changes, when they happen, dent the recent growth pattern that could easily see total SIPP assets exceed £750bn by 2030.
John Moret is principal of MoretoSIPPs
