Dealing with distressed investments in SIPPs

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SIPP investments have been a hot topic in 2018 for various reasons, whether it’s investment due diligence, scam investments or compensation schemes.

While these are all important issues, they are all broader industry matters, and it’s important we don’t ignore the fact there are underlying clients in challenging situations.

What I want to focus on here, therefore, is what you can do if you’re dealing with a SIPP that already holds a distressed investment.

There are many different backgrounds to these investments. Some were subject to fraud, others fell down due to lack of regulatory oversight, and others simply didn’t survive one of the economic downturns of the last ten years.

Many advisers will also remember how property funds were suspended in the wake of the Brexit vote, and may be wary about something similar happening on 29 March 2019.

Whatever the background, the two things distressed investments normally have in common is that they can’t be sold and they can’t be transferred.

Poor customer outcomes

If the investment is held outside of a SIPP, the issues are limited to that investment. When it’s held as part of a SIPP, however, it can lead to poor outcomes for clients in respect of their whole pension scheme.

For example, they may be prevented from transferring to another provider, particularly if the whole fund is in drawdown – the rules don’t permit you to split a crystallised arrangement.

They might be prevented from taking benefits, either within the current SIPP or through an annuity.

They might also find themselves in a situation where they only have one investment left in the SIPP, but the investment can’t be shifted and is loitering indefinitely. All the while, the client is having to pay ongoing administration fees to the provider.

What can’t you do?

Many clients will simply ask if they can write off the investment, and this makes sense – if you remove the investment, you remove the blockage.

Unfortunately, pension scheme administrators may be unwilling to go down this route given there is no express mechanism in legislation that allows it.

Furthermore, there is a risk it could be challenged by HMRC as an ‘assignment’ of pension rights, which is an unauthorised payment. So as well as losing a chunk of their pension funds to a defunct investment, the client could also incur an unauthorised payment tax charge.

There are schemes such as ShareGift that allow the donation of small investment holdings to charity. Again though, while many scheme administrators would like to facilitate this, there is nothing in the pensions tax legislation that expressly permits this.

What can you do?

In most cases, scheme administrators may be unwilling to remove the distressed investment from the SIPP until they’ve received formal confirmation that it’s been wound up.

This can be a lengthy process, particularly if there is an ongoing fraud investigation or a complicated recovery of assets.

Some administrators may be persuaded to act earlier if, on the balance of probabilities, there is very little chance of any funds being returned. However, it’s not always practical to gather enough information upon which to base that decision.

One solution that may work from a technical perspective is for the client to personally purchase the investment from the SIPP.

This could be facilitated on a platform, for example, where the client could set up a GIA alongside their SIPP. They could put cash into the GIA, and have the GIA purchase the holding from the SIPP. So the investment goes one way and cash comes back the other way.

Because it’s a zero sum transaction, there is no assignment of pension rights, and there’s virtually no risk of an unauthorised payment.

It would, however, be a connected party transaction given it’s between the client and their pension scheme. This means it must be conducted on arm’s-length terms and based on a true market valuation.

There could still be a challenge in finding a true valuation for the holding, but this also means there is more flexibility, and scheme administrators may be comfortable accepting a valuation that, while not exact, is still based on a range of reasonable assumptions.

This solution doesn’t completely resolve the situation, given the client is still holding the investment. But by removing it from the SIPP wrapper it gives clients and advisers the flexibility to carry on the important job of retirement planning.

Technical Team Leader

After completing his postgraduate studies at Lancaster University, Martin spent two years working for a leading insurance company before joining AJ Bell in April 2007. Martin worked initially on the AJ Bell Investcentre product before moving to a technical role in 2009. His main focus is providing technical support to the various teams and departments within the business. He is also involved in delivering training to staff on the rules and regulations that affect our customers.

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