How safe is a SIPP?
|Retirement | SIPP
Asked by whiskyjack, submitted
11 August 2011.
I have accumulated a significant pension pot spread accross multiple houselhold name providers and am approaching the point of taking benefits. I am in no doubt that a self invested SIPP based income drawdown pension suits my needs.
The low cost internet based options (such as SIPPdeal) look good value, compared with the household names (who won't speak to me unless I give an IFA £15k to tell me what I know already). However I can't help feeling concern about taking my life savings to a small relatively unknown organisation.
If they are just acting as a broker and adminstrator maybe there is nothing to worry about? Are their hidden couterparty risks in using such a service? Can I mitigate risks by using two SIPP providers in drawdown?
Answered by Justin on 19 August 2011
Ignoring investment performance, the main risks when using a SIPP are someone illegally dipping their fingers into your pension fund and an underlying bank going bust if you hold cash. Both are small risks, but ones nevertheless to be aware of.
When you hold assets within a SIPP, the SIPP provider (e.g. Sippdeal) will hold them in trust for your benefit. This means your pension pot should be unaffected if the provider goes bust. However, if the provider has illegally taken money from your pension fund and can't afford to repay it, Financial Services Compensation Scheme (FSCS) cover would be limited to £50,000.
Any underlying investment funds also hold your money in trust for your benefit, so are ring fenced from the underlying fund providers going bust. Again, the FSCS would cover up to £50,000 per fund provider.
If you hold cash in your SIPP and the underlying bank or building society goes bust you'll normally be covered for up to £85,000 per institution - but check with the SIPP provider as in theory they might bundle everyone together so that the £85,000 applies to all SIPP clients combined - meaning the protection is effectively worthless.
The FSCS protection for SIPPs is different to that of conventional insurance based pensions (which invest in insurance company funds), where the compensation level is 90% of an unlimited amount. This causes much confusion, not helped by the FSCS failing to publish clear information on their website - under pensions they just say 'it's complex so contact us for details'.
Should you be unduly worried? I don't think so. The underlying investment risk is the same whichever SIPP provider you use. So the real issue is whether a specific SIPP provider is likely to commit fraud and steal your money. While we can never say never, I think the likelihood is very low provided you use an established company that's been running for a few years. So I'd be fairly relaxed about using one provider for your pension fund. In any case, to ensure full FSCS protection you'd need to use a different SIPP provider for each £50,000 invested, which would be rather impractical in your case.
Best wishes for a happy retirement.