Taking Interest From Clients - Deposits Is it fair?

David Baker Wealthtime

February 2009

The continuing dramatic drop in interest rates and the likelihood that they will remain low for sometime to come is exposing as never before the practice many SIPP Providers adopt of taking a cut of the bank interest on the monies held by the SIPP as trustee on behalf of their clients. If the bank account were in the client’s name this would not be possible but largely because of HMRC requirements, the SIPP, as well as administering the client’s pension scheme, is also required to act as Trustee which means the assets of the scheme, although belonging beneficially to the client, are held in the name of the legal owner – the trustee, including the bank accounts. This is no different to any other type of trust but unlike a normal trust, in the case of a SIPP the SIPP trustee does not get involved in any investment decisions which is one of the most important responsibilities in most trusts – the client and his adviser do all that - it is the essence of the SIPP concept. So the SIPP trustee is what is known in law as a “bare” trustee – a trustee who is just responsible for holding the assets. Yet this quirk of the law enables them, as the bank accounts are in their name, to instruct the bank that they should receive part of the interest on the account, the client getting the balance.

This may not have been too bad – or rather too noticeable – when interest rates were at a decent level but now they are down to their current levels and predicted to fall even further, with many SIPP Providers taking a cut of typically between 0.5% and 1%, it is beginning to mean that the amount taken by the SIPP Provider is equalling or even exceeding what is left for the client. If rates are lowered further it could mean clients get nothing in some cases as SIPP Providers who have these banking arrangements have first call on the interest.

This raises some interesting questions, in particular is this a proper way for a trustee to behave? After all, trustees are supposed to act primarily in the interest of the beneficiaries of the trust – in this case the SIPP client. Some Providers say in the literature that they may derive benefit from bank interest the SIPP receives, some even give their percentage take. But does that really excuse this practice when it could mean the client getting nothing? Worst still, are those Providers, not all by any means, who will not let their clients put cash on deposit other than with their specified bank. Thus the client is forced to accept interest rates which are usually quite low anyway, even before the SIPP Provider has taken its share, compared to what could be obtained elsewhere in the market.

The client really has no redress for this loss of income to their pension fund. And that brings us to another sting in this particular tail – not only are the clients of SIPP Providers who take a cut of the interest rate now getting very little return on their cash, but there is a lot more cash on which they are getting this than there was a year or two ago, because, with the current state of the investment markets, clients are understandably cautious at present and are typically holding a much greater portion of their funds in cash than previously.

So the client loses out again, and it seems likely, though no one will admit it, that these SIPP Providers are quietly doing very well getting their fixed cut on much larger sums than previously, and probably for doing less work because there is not so much to do when funds are sitting in cash than when they are being used to buy and sell investments. Yet all we hear are complaints from such Providers that if they are forced to accept reduced interest margins they may have to increase their administration fees to compensate for this - little sympathy for the client, and no suggestion that it may not be too unreasonable in the current climate to expect them to share some of the pain.

It seems unlikely anything will be done about this practice on a voluntary basis, but SIPPS are now regulated and with interest rates as they are and likely to decline further, it is surely the right time for this opaque method of charging to be revisited.


This article represents the personal views of the author and is not intended as a substitute for professional financial advice.


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