SIPP operator should have clarified disinvestment strategy on drawdown increase
FOS has upheld a complaint where, following a member's instruction to significantly increase his income drawdown payments, the SIPP operator disinvested across the member's underlying portfolio of investments in order to make the payments (DRN7768809).
The member had started taking drawdown income of £720 per month from April 2017. He gave instructions that all income withdrawals were to be funded from his cash fund only. In September 2017, the member wrote to the SIPP operator to say that he wished his monthly income to be increased to £1750 per month from October 2017. That correspondence contained no instructions regarding which of the underlying portfolio of investment funds should be used to fund the increase. In June 2018 the member received his annual SIPP statement which showed that the increased income payments from October 2017 had been taken proportionately from all funds held in his SIPP.
The member complained that his request to increase his income payments should have been treated in the same way as the initial request which stated that income drawdown payments were to be taken from his cash fund. The SIPP operator said that the member's adviser had previously asked what was needed to ensure income was taken from just one fund, and it had advised him the instruction needed to be in writing. When no written instruction regarding the funds to be used for the increases had been received, the operator had defaulted to its "standard procedure" to reset the disinvestment strategy so that income would be generated by selling units proportionately across all investment funds held in the SIPP.
The Ombudsman upheld the member's complaint. As the instruction to increase the payments had given no instructions as to how the increases were to be funded, the Ombudsman said he could understand why on face value the operator would have assumed it should adopt its usual practice for disinvesting funds in order to pay a monthly income. However, he concluded that the SIPP operator's T&Cs were not sufficiently clear in explaining what the operator's "standard procedures" were in such circumstances.
The Ombudsman concluded that the SIPP operator should have sought confirmation from the member regarding which funds should be used to fund the payments, and that that would have led to the member clarifying that he wanted the cash fund to be used. The Ombudsman noted that the process followed by the member to increase the payments in September 2017 was not the same as the process followed to start payments in April. The Ombudsman said he could therefore understand why the member didn't think he was making a new application in September 2017, but instead thought he was only giving an instruction regarding the level of income he wished to receive without making changes to the disinvestment strategy. The Ombudsman ordered the SIPP operator to compensate the member for any loss suffered as a result of funds being withdrawn across the portfolio rather than solely from the cash fund.
This Ombudsman decision illustrates the importance of SIPP operators' T&Cs being totally clear as to how benefit payments will be funded, and whether any initial disinvestment instruction by the member will be taken as also applying to any change to benefit payments or new benefits brought into payment.