The pros and cons of SIPP's

One of the most popular investment opportunities in the UK is the Self-Invested Pension Plan or SIPP.

The allure of a SIPP is the wide range and variety of options when it comes to investment; you can put your money in unregulated funds, private equity, loans – whatever attracts your interest. The downside is that ‘unregulated’ part; there are more opportunities for fraud and seemingly always someone eager to take advantage of them.

SIPP’s can only be provided by government and HMRC approved organisations and they are regulated by the FSA. The ‘Catch 22’ in this case is that amongst all the rules and regulations, the way it works out is that any organisation that officially requires regulation doesn’t need it, and the ones that don’t require regulation do need it but aren’t getting it. Therefore the investor who loses money in a fraudulent self-invested plan is often without recourse.

From the evidence of recent events and court cases, the favourite fraudulent schemes involve land development and/or ‘green’ investments. In the case of property development, a company might urge investors to buy into a proposed hotel or other commercial operation that, according to their figures, will pay enormous dividends when it comes to fruition. Then it goes bust, for various reasons, and optimistic investors (unkindly known as ‘suckers’) can kiss their money goodbye.

The ‘green’ proposals play to the investor’s desire to participate in sustainable futures, and of course to take advantage of the potential tax breaks involved. A case in point is one that came to light recently, in which investors were sold an interest in tracts of jatropha trees. The seeds of the jatropha contain oil that can be used as diesel fuel and a residue that can be used in powering electrical plants.

Investors were promised big tax breaks and tax-free capital gains when the jatropha forests were sold.

However, those forests purported to be growing in Thailand and Indonesia turned out to be fictional, and around 1,500 investors ended up losing an average of £20,000 each, with little hope of getting any of it back.

In another recent case, the FSA removed its permissions from the SIPP operator HD Administrators, a company based in Nottingham. Its directors were arrested on suspicion of fraud that included false representation and money laundering. HDA’s unauthorised investment company Arck is now subject to a civil claim from investors who say that they lost, in total, around £20 million.

The perpetrators of SIPP frauds will often use e-mail messages that advertise exciting investment opportunities, claiming to be ‘SIPP-compliant’ to convince the recipient that it’s a legitimate deal. If this sort of offer arrives in your inbox, you should be very wary, according to lovemoney.com.

The reason is that legitimate SIPPS are not allowed to advertise in this manner; they can’t promote a “great deal” as such, they can only offer details for the client to consider and weigh against other opportunities. Cold-calling and unsolicited mailings are not on the approved marketing list.

It should also be noted that these unscrupulous marketers are working on a commission of up to 25%, so they’re getting their cut from the top, never mind what happens to the investors when the scheme doesn’t pay off.

According to ftadvisor.com, SIPP fraud is an irregularity and the advantages of a SIPP should not be discounted just because a few are caught in nefarious acts. Most pension providers are legitimate and adhere carefully to ethical and legal guidelines. In the absence of specific regulations, it would seem to be up to the individual investor to practice due diligence in the choice of investments. That involves checking the bona fides of the investment company and of the specific offer being considered.