Investment funds can hit the rocks for different reasons, and over the last 10 years we must have run the full gamut, whether it’s mismanagement, poor returns, economic downturn, liquidity mismatch or even fraud.
In some cases, as with open-ended property funds, the funds are suspended but still a viable investment.
In other cases, they’re being wound down due to poor performance, and money is coming back in dribs and drabs. And in some cases, they’re virtually defunct, leaving investors in the dark as to whether they’ll get anything back at all.
What these funds tend to have in common is that they can’t be sold and they can’t be transferred.
When a distressed fund is held in a SIPP (or a SSAS), it can present challenges in several areas.
With transfers, the pension rules require that a drawdown fund be transferred in full. If there’s a distressed fund that can’t immediately be sold or transferred, meaning the transfer takes place over a protracted period of time, there’s a chance that HMRC could view that as a partial transfer and therefore an unauthorised payment. The scheme administrator may therefore be unwilling to proceed with the transfer.
Since 2015, we’ve seen clients taking advantage of the pension freedoms to withdraw their entire pension. If there’s a distressed investment, it might not be possible for the client to withdraw the whole amount. The client could, of course, withdraw everything else. Depending on how it operates, the provider might still charge ongoing admin fees when all that’s left is a virtually valueless investment.
Distressed investments can also cause blockages with annuity purchases, and we’ve also seen cases where we’ve had to work around them in pension-sharing cases on divorce.
In terms of resolving the situation, one thing you can’t do is gift the holding to charity. Scheme administrators would like to facilitate this, but there’s no provision for it in the pension rules, which means HMRC could view it as an unauthorised payment.
Instead, one avenue to explore is whether the client could purchase the investment out of their SIPP. This would be a ‘connected-party transaction’, so the rules require the holding to change hands at a true market value.
Depending on the situation and the information available, this will be easier to ascertain in some cases than others. It’s worth bearing in mind, however, that if it’s a challenge for the scheme administrator to determine a cast-iron valuation, the same applies to HMRC.
In practice, this gives a bit of leeway, and it means you are really looking to establish a valuation within a reasonable range of valuations.
Once a valuation has been established that all parties are happy with, the client could open a dealing account with the same custodian that holds the fund. They can then put funds in the account and have it purchase the holding from the SIPP.
It doesn’t resolve the issue entirely, but it does remove the distressed holding from the SIPP, meaning the client can move on with their retirement planning.
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