Are SIPPs really, “the gateway drug to bad investments”?
I recently met with a client who wanted to set up a personal pension. As is my experience with most clients, as our conversation unfolded, we discovered there were far greater planning matters we needed to address than simply setting up a personal pension.
As such, our conversation turned towards Self-Invested Personal Pensions (SIPPs), which I suggested could serve as an excellent tool for tax-efficiently redirecting rent paid in respect of his business premises into his own retirement savings. What was my client’s response? “Aren’t SIPPs dodgy?”
To be honest, I’m not surprised that this was my client’s perception of SIPPs. They have gained a bit of a bad rep in the news recently with the British Steelworkers pensions ‘mis-selling scandal’; with one solicitor calling SIPPs “the gateway drug to bad investments” (Professional Adviser, November 2018). So how do SIPPs differ from normal personal pensions which gives rise to this increased risk of bad investment decisions?
In simple terms, SIPPs offer a far greater suite of investment solutions when compared to normal personal pensions plans (which generally only offer investment in collective investment ‘funds’). Within a SIPP, it is possible to hold commercial property as an investment, shares in individual companies, cash deposits, structured products, to name a few of the options. There is also additional functionality associated with SIPPs, including the ability to borrow money within the pension.
With all these additional options, selecting the most appropriate investment solution does, of course, become more complex. This gives rise to the importance of seeking financial advice from a suitably qualified, unbiased professional.
As a financial adviser, I view my role to be that of an educator; giving my clients the tools they need to make an informed decision about their finances. Not only does application of this principle ensure that clients fully understand the risks of a course of action, but it also cultivates an honest client-adviser relationship whereby a client can feel comfortable saying “I’m not quite sure” or “actually, I’ve changed my mind”.
To me, this is the cornerstone of good financial advice and, without it, the risk of “bad investment” decisions is not limited to SIPPs, but extends to any type of pension or investment. To this end, I have detailed below five key points to consider when discussing SIPPs with a financial adviser, which can aid the quality of decision making:
- Do the additional investment options offered in a SIPP make sense given your circumstances? (e.g. have you a genuine interest in, or need to, invest in commercial property or direct shares?)
- If yes, has your adviser emphasised the risk of these investment solutions versus ‘traditional’ pension investment options (such as investment ‘funds’) or, in the case of transferring existing pension benefits to a SIPP, versus what you are giving up (e.g. guaranteed income) to access these investment solutions.
- Has your adviser thoroughly assessed your attitude to risk and capacity for loss, and explained why the investment solutions of a SIPP are suitable given the outcome of this assessment?
- Has your adviser put unreasonable pressure on you to make a quick decision* about your pension funds, or put pressure on you to proceed with a recommendation you’re not completely comfortable with?
- Has your adviser quoted “guaranteed returns” for a SIPP investment without supporting evidence, or recommended a solution that sounds too good to be true?
*There can sometimes be tax year dependent or provider-imposed deadlines to undertake a course of action, however, these should be properly explained to you by your adviser. In any event, your adviser should not pressurise you to meet these deadlines if you are uncomfortable with the advice given.
In sum, I believe the assertion that SIPPs are “the gateway drug to bad investments” to be extreme. It’s almost like saying anyone who gets a credit card is going to max it out on day one and be filing for bankruptcy the next. SIPPs in isolation are not “dangerous” investment vehicles but, like credit cards, if we are given unclear information as to how they work and the risks they entail, or do not have the tools to critique the information provided, we can put ourselves at risk.
Always challenge the information presented to you and, if in doubt, seek a second (or third, or fourth!) opinion from another qualified adviser.
If you would like to discuss this blog in more detail please email Katy Allen or call us on 01772 821 021.