A number of alternative investments can be held within a pension scheme. These can be general company pension schemes or pensions aimed more at individuals or senior executives. For general company pension schemes the investment decisions will be for the trustees to decide with little or no restrictions imposed by either HMRC or any regulator.
However for certain types of pension where the member has the ability to direct the investments, HMRC has set out certain restrictions; indeed tax charges are payable if certain investments are held or certain transactions carried out. This mainly covers Self-Invested Person Pensions (SIPPs) and Small Self-Administered Schemes (SSASs). See Pension taxation and investments page.
In addition to the tax rules, the operators of SIPPs are regulated by the Financial Conduct Authority (FCA). The FCA has issued guidelines to SIPP operators when accepting “non-standard investments” in their pension, and has come up with 5 key considerations. These are:
- correctly establishing and understanding the nature of an investment
- ensuring that an investment is genuine and not a scam, or linked to fraudulent activity, money-laundering or pensions liberation
- ensuring that an investment is safe/secure (meaning that custody of assets is through a reputable arrangement, and any contractual agreements are correctly drawn-up and legally enforceable)
- ensuring that an investment can be independently valued, both at point of purchase and subsequently, and
- ensuring that an investment is not impaired (for example that previous investors have received income if expected, or that any investment providers are credit worthy etc.).
Given the tax rules, the FCA’s rules and the general commercial concerns of pension operators/ trustees, the investment must have certain characteristics for it to be held in their schemes:
- Commerciality – the investment should have a structure, purpose or potential return predicated on something tangible.
- Ownership – the investment must be capable of being held by the trustees or insurers. In most cases this is not a problem and the investment application/documentation will reflect this. However there are instances where ‘trustee’ ownership may not be recognised – for example some European countries such as France and Germany do not allow trusts to hold property. In such cases, an investment vehicle, such as a limited company (of which the trustees may be shareholders), may need to be set up to hold the property on behalf of the pension scheme.
- Agreements – the contractual agreements for the investment should be correctly drawn-up and legally enforceable. This should cover the agreements with all parties to the investment including the custody or ownership of the assets, debentures, etc.
- Taxation – there are a number of factors that need to be guarded against to ensure the investment does not trigger a tax charge (see Pension tax and investments page). These include residential property, tangible moveable property, person enjoyment by members and their connected parties, transactions with members and their connected parties, being a trading activity, etc.
- Liquidity – need to be able to redeem, sell or transfer the investment timely to pay benefits or make other payments as they fall due. Therefore any restrictions on potential purchaser will need to be known e.g. exempt property unit trusts only allowing tax exempt investors or qualifying investor schemes only being available to sophisticated investors.
- The ability to value – scheme investments need to be formally valued at certain times, e.g. paying benefits or for issuing annual statements to members. Therefore consideration should be given to how easy it is to get a current open market value of the investment and the costs associated with this.
- Limitation of liability – scheme trustees/operators will not want to accept open-ended liabilities attaching to an investment as the scheme may not have sufficient funds to meet them or the scheme member unable to make future contributions. In such case the liability would then fall on the trustees/operators unless their liability was restricted to the assets of the scheme available to them.
- The parties involved with the investment – need to know who are all the parties involved in the investment. In addition need to know the past performance of the investment and each party’s past experience with investments, past involvement with this type of investment, involvement with other investments that have failed and generally.
What is important to stress, as is repeated throughout this website, is that the comments are generic rather than specific to a particular investment and are produced for guidance and information purposes only. It is always recommended that prior to making an investment, professional advice should be sought from a suitably qualified and authorised adviser.