How Safe Is My SIPP?
Your SIPP is protected, though the extent of this protection depends upon the investments your SIPP holds.
FSCS protection
The Financial Services Compensation Scheme (FSCS) was designed to help you when an authorised firm fails. It paid out over £110m in compensation for SIPP-related claims in 2017-18.
Having FSCS protection means that…
* It’s automatically paid out to you when an authorised firm fails.
* It’s free, and funded by a levy on the industry.
* It’s only paid out if the FSCS’ investigation determines that a company is unable to pay out on its own.
* It’s designed to compensate individuals. Which means that if your investments are held in a company, or pooled with others, your compensation could be affected.
* It’s normally tax-free, though you could incur tax if you were looking to receive interest on the defaulting company.
* Probably won’t cover anything that happened before 28 August 1988.
* How much coverage you get depends upon the type of SIPP provider, and the investments held within the SIPP.
However, the FSCS can’t protect you from the price fluctuations which are common amongst SIPPs that are exposed to market movements.
As an example, if the firm that holds your SIPP goes bust due to a series of poor investments, you’re likely to be covered by the FSCS. However, if some of the funds in your SIPP underperform but the firm doesn’t go bust you won’t have a case.
Protecting your assets from the fluctuations of the market is largely a matter of smart asset allocation and, if we’re honest, some luck.
What pension protection do I need?
You don’t really need any insurance against your provider failing, seeing as this is provided for free by the FSCS. Keep in mind though, there’s is an upper limit on this of £85k and the FSCS only cover FCA-regulated products.
The type of investment
When you invest in a SIPP, there’s a risk of your SIPP provider failing, along with a separate risk of the investments within your SIPP failing.
The investments within a SIPP are legally ‘ring-fenced’ from the SIPP provider itself. That means that, even if the provider fails, the investments are safe – and also entitled to their own, separate FSCS protection. The extent of this protection depends on the type of product.
Of course, the firms that your SIPP invests in could theoretically fail, even if your SIPP provider remained solvent. Not to worry though, it’s likely that the FSCS will cover them too.
Your provider
Provided your SIPP is a contract of long-term insurance, you’d be covered up to 100% of the value of your investments – with no upper limit on compensation.
If you really want to be sure, you could ask your provider to confirm, in writing, that the SIPP is a long-term insurance contract, and covered by the FSCS.
An insurance product held within a SIPP
Long-term insurance products are protected up to 100%, with no upper limit.
A ‘direct’ or unregulated investment
Direct/unregulated investments on their own are not directly protected by the FSCS. So, for example, if you invested directly in a company through your SIPP that failed, you wouldn’t be covered.
However, if you bought into this company on the advice of a regulated advisor or the company is authorised to give advice you’d be covered up to £50,000.
Unit trusts or Open-Ended Investment Companies (OEICs)
You’d be covered up to £85,000 per person or firm.
SIPP fund protection for cash held
If your cash is held in a bank, credit union or building society, your funds are protected up to £85,000 per bank.
The ‘banking license’ caveat: The protection limit applies to each individual banking license. However, quite a few banks share the same license. For example – AA, Saga, Aviva, Bank of Scotland Halifax, BM Savings, Intelligent Finance, Capital One and St James’s Place Bank are all under the same banner.
So, if you have more than £85k saved in cash with your SIPP provider, you may want to ask them where they are storing your funds. To get around this you could, in theory, hold cash in multiple SIPPs – though you could end up paying multiple sets of SIPP charges, depending on how many of them you hold investments in.
Remember: If you’re ever in doubt, ask your SIPP platform how the investments within your SIPP are structured, and what kind of protection that each investment is entitled to. By law, they have to tell you.
Protected rights funds
‘Protected rights’ refers to money made up of national insurance rebates for people who opted-out of the State Second Pension.
The term ‘protected’ came from the fact that these pensions had to use insured funds, which were 100% protected by the FSCS. This limited the kind of investments that you were able to make protected rights funds.
That said, in 2012, protected rights were abolished entirely. Any protected rights funds are now typically referred to as ‘former protected rights’ and to all intents and purposes are no different from ‘unprotected’ funds in what you’re allowed to do with them.
In the context of your SIPP, this means that you don’t need to worry, and can treat them in much the same way.
Enhanced protection
If you’re one of the few people who still hold enhanced protection status on your pension, you’ll want to be careful before doing anything with a SIPP, as you could lose your enhanced protection.
As a rule of thumb, any further contributions made after April 2006 could cause you to lose your status, and you can’t reapply, once you’ve lost it.
Can I apply for tax protection?
Some SIPP holders may be eligible to minimise future tax charges by applying for one of the protections that are available: fixed protection 2016 and individual protection 2016.