A series of significant forthcoming changes could not just increase the cost of your SIPP, they could put your SIPP provider out of business
The Forthcoming Changes Are So Dramatic, Not All SIPP Providers May Survive!
Look What Could Be Troubling Your SIPP Provider
1. Banking Rules Could Affect Your SIPP Provider
Familiar with the Basel III banking rules? Thought not. Many SIPP providers are worried though.
From 1 January 2016, banks will be required to hold 100 per cent of instant access cash and make it available within 30 days. Currently, they can earn interest lending it out on behalf of SIPP providers.
In response to the rules, banks are already cutting interest rates. From early next year, a number of banks have said they’ll pay no interest at all. Some industry experts are predicting it will cost the SIPP industry tens of millions of pounds a year.
Back in 2013, in an attempt to clean up the way that financial services firms earn their money, the regulator insisted all firms transparently declare their earnings. But it seemed to overlook the issue of interest earned on SIPP accounts. Here’s the problem.
Many SIPP providers have negotiated interest rates with banks based on what are often huge sums of money. But some SIPP providers don’t always pass onto their customers the full rates they’re paid. That’s questionable behaviour to say the least, and it’s a subject on which we’ve reported earlier in an article entitled Is Your SIPP Operator Earning 9 Times More Than You On Your Cash?. It seems that chickens are about to come home to roost.
Last year, one major SIPP provider said that falling bank rates were entirely responsible for a 40 per cent fall in profits. And earlier this year, the largest stockmarket SIPP provider posted a 5 per cent fall in pre-tax profits, stating it was partly due to a reduction of £17m of lower margins on client cash.
It seems the majority of SIPP providers take an interest margin. Whilst some would no doubt argue this income enables them to keep their fees competitive, the two examples above show this cash is heavily contributing to profits. Money that’s arguably yours, stolen from your future retirement prospects.
It follows that if your SIPP provider’s profits are hit, it could mean the cost of your SIPP is likely to rise. In the worst case, it could put your SIPP provider out of business.
2. Limited Pension Contributions Could Cut SIPP Provider Income
If your SIPP provider charges you fees, charges and costs based on the funds you have under management, in April 2016, they could be in for a potential reduction in income.
Annual allowance tapering for higher earners is likely to limit the amount of money people can put into their SIPPs. It’s no surprise that many SIPP providers are currently seeing a significant increase in maximum contributions from their most affluent customers, ahead of the changes coming through next year.
3. New Capital Adequacy Rules For SIPP Providers Come Into Force
Under the rules, SIPP providers are required to hold capital in reserve based on assets under administration, with an additional charge linked to the proportion of non-standard assets held. The amount of capital they hold is set to rise dramatically in October 2016.
It’s created a couple of issues if you hold non-standard assets in your SIPP:1. Many SIPP providers have already increased the cost of holding non-standard assets, and it’s expected fees may increase again when the new rules come into force. 2. Quite a number of SIPP providers have reduced the range of non-standard assets you can hold in your SIPP, or stopped allowing them altogether, limiting your investment choice.
This issue has been breeding uncertainty among SIPP providers for a couple of years, as we highlighted in an article entitled Why The Choice Of SIPP Investments Is Diminishing.
4. SIPP Providers Are Being Hit By Rising Regulatory Charges
Estimates by one large full SIPP provider suggests the total regulatory costs for SIPP providers could rise by 75 per cent compared to previous years, mainly as a result of rising Financial Services Compensation Scheme levies.
Since the recent introduction of Pension Freedoms, there’s been a dramatic proliferation in the number of scam and fraudulent investment schemes, sufficient for the regulator to dedicate a whole section of its website to the subject. The cost, however, is being borne to some degree by SIPP providers, along with all other regulated firms, and it’s more than likely some of this cost could be passed onto you.
5. A Change In Tax Breaks Could Reduce SIPP Providers’ Income
The Government is presently consulting on whether ISAs and Pensions should be replaced with a single tax-privileged investment. As part of the consultation, the whole area of pension tax incentives is under scrutiny.
If tax relief is be abolished or your right to draw tax free cash at retirement is scrapped, the result will almost certainly restrict the value of new funds flowing into pensions. SIPP providers are bound to be affected by falling revenues, particularly those that charge on a ‘percentage of funds’ basis.
Talk To Your SIPP Provider Now
It’s no surprise that market forces in general, and the above things in particular are contributing to the reduction in the number of SIPP providers. But as with all areas of business, the strong and adaptable will survive, whilst others will lose out to the competition.
The problem, of course, is that customers are often caught in the crossfire. Let’s hope you’re not one of them!
To avoid being affected, your best course of action is to contact your SIPP provider now. Ask them to explain to you how they’re going to deal with the above issues, and any others that are concerning you.
If you’re not happy with the answers, consider switching to a SIPP provider that is aware of the issues and has a detailed plan in place to cope with them, for their benefit, and for yours too.
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