SIPP Protection: How Safe Is My SIPP?

Your SIPP is protected, though the extent of this protection depends upon the investments your SIPP holds. In this article, you’ll find out about the kind of regulatory protection that you’re entitled to, and how this can vary.

Need a faster answer? Get in touch. The SIPP experts we work with can help you to see what protection you have, and what you need to do to reduce the risk to your portfolio.

Here’s what you’ll learn in this article:

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Is my SIPP protected?

As we said earlier, how much protection your SIPP has depends on what, exactly, you hold within it.

FSCS protection

The Financial Services Compensation Scheme (FSCS) was designed to help you when an authorised firm fails. As an example, 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.

Whilst teaching you to be luckier is, sadly, not something we can offer, the expert pension advisors that we work with can help you to find a plan with the right asset allocation for your needs and will conduct regular (usually annual) reviews with you to keep you appraised of performance and if necessary advise on taking action if things are not going well.

Get in touch and we’ll connect you with the advisor with the right expertise for you.


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. We’ll go into this in more detail below.

Your provider

Provided your SIPP is a contract of long-term insurance (and the vast majority are), 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.

If you’re worried or have any questions about this, get in touch and one of our experts will be able to put your mind at rest.


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.

Click the links for more information or make an enquiry here to find out if you’re eligible for SIPP tax protection.


Talk to a pensions expert today

If you have questions about SIPP fund protection and want to speak to an expert for the right advice, call us today on 0808 189 0463 or make an enquiry here.

The pensions experts we work with are independent, can offer bespoke advice on SIPPs and introduce you to the best providers of these products if you decide it’s the right option for your needs and circumstances. We don’t charge a fee and there’s absolutely no obligation.

We can arrange a free pension review for you today

70% of customers who have a pension review find a better deal

We can arrange a free pension review for you today

70% of customers who have a pension review find a better deal

Author:
Tony has worked in a vastly diverse array of areas in the pensions industry for over 2 decades. Tony regularly writes for trade press, usually on topical and pensions pieces as well as acting as a judge at prestigious national events. Tony is also a highly qualified Independent Financial Adviser in his own right. His mantra has always been "Hope for the best, but PLAN for the worst", and believes that the biggest impact that an adviser can have on a client's life journey is to take them on a journey from generally having little or no real idea of what their retirement will look like, to giving them the understanding of what their retirement looks like now, then helping them navigate a path to what they WANT their retirement to be.

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