New rules Sipp providers could see pension holders pay more

Savers could be hit with higher charges for investing their own personal pension as a result of FSA measures to reduce the risk of consumers being harmed should a provider fail.

Self-Invested Personal Pension (Sipp) providers will over the next few years be required to increase the amount of capital they hold so they have enough to pay for the transfer their clients' assets to a new home in the event the administering company winds down.

It has been said that the move, being taken to ensure customers' investments are not touched during the wind down process, could see Sipp providers forced to increase their reserves ten-fold on average, a figure which could see some firms run into the ground.

Bad news for savers: Sipp firms may have to increase charges for their products to meet new FSA requirements.

But it could also lead to a rise in the fees charged by companies offering Sipps, as well as more upheaval for customers due to a heightened risk of providers folding. It is therefore vital that savers research their potential provider before they take out such a pension.

Murray Smith, of Sipp provider Mattioli Woods, said: 'The main thing for the consumer is that it is highly like that Sipp fees will have to increase quite substantially, because a lot of providers will have to put more aside than they charge to set up the product.

'In order to meet the requirements, they will potentially have to put up the fees very significantly or they are going to have to restructure the sort of investments they will accept, which defeats the purpose of a Sipp.

'There could also be quite a lot of consolidation in the Sipp market, which could see customers lose absolute control over who their provider is and what the costs are.

'Any Sipp or potential Sipp customers need to look carefully at which provider they are with and what their financial background is.'

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Sipps are a form of personal pension introduced in 1991 to give pension holders control over where their money is invested. Investors can choose their own assets or appoint a manager to invest it on their behalf.

Whether a Sipp firm shutting down as it is unprofitable or it's a one-man band looking to retire, the money invested by pension members is safe under UK law as pension investments have to be ring-fenced from a firm's other assets.

But the FSA is concerned that firms without a sufficient cash buffer will not be able to be move assets without disruption, and potential cost to clients.

Currently, operators are required to hold an amount of capital which is the higher of £5,000, six weeks of expenditure or 13 weeks of expenditure if they hold client money.

But the changes, due to come into force in late 2014, will require providers to have at least £20,000 in capital.

On top of this, they will have to have in reserve a 'capital surcharge' which is calculated based on the proportion of its pension schemes which have some money invested in 'non standard assets' - such as commercial property - so they have enough money to wind down bearing in mind these assets typically take longer to transfer to a new company.

It is thought many firms could face a paying for a capital requirement ten times its current level.

Consumer impact: Murray Smith, of Mattioli Woods, said people should research their potential Sipp provider's financial credentials before committing.

Danny Cox, of Sipp provider Hargreaves Lansdown, said: 'I think it's important to see capital adequacy requirements changes because it is quite low.

'Six weeks to wind down is a very short time and it's important for the suitability of financial services companies that they are able to withstand [the winding down process].

'It is likely to reduce the amount of Sipp providers quite significantly as there will be those who can't meet the capital adequacy requirements, so it's important to do your research into Sipp providers.'

The FSA has supervised the Sipp market since 2007 and said the requirements needed to be increased following the proliferation of providers since then.

In announcing the change, it said: 'We believe that the current level of capital being held by many operators would be insufficient to meet the cost required to facilitate a more orderly wind-down.

'The alternative to these costs being met by the operator is that they are met by realising individual consumers’ investments.

'This would cause significant harm to consumers, and it is likely that a tax charge would be imposed on the scheme by HMRC as a result of the assets being removed from the tax-protected pension wrapper, further reducing the value of individual consumers’ income in retirement.'