SIPP Safety: How Secure Is Investing?

SIPPs are regulated by the Financial Conduct Authority (FCA), providing a level of safety through oversight. However, investment risks depend on the chosen assets within the SIPP, highlighting the importance of informed decision-making.
  • Last Updated: 22 Mar 2024
  • Fact Checked
  • Our team recently fact checked this article for accuracy. However, things do change, so please do your own research.

Contributors:

Francis Hui
Read On to Find Out About the Safeguards that Protect Your SIPP and Keep Your Investments Safe!
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Key Takeaways
  • Regulatory bodies like the Financial Conduct Authority (FCA) enforce rules and regulations to ensure the safety of Self-Invested Personal Pensions (SIPPS).
  • SIPPS are considered reliable for retirement planning due to their flexibility, allowing individuals to invest in a wide range of assets.
  • Like all investments, SIPPS carry potential risks, such as the possibility of poor investment returns or changes to pension legislation.
  • SIPPS are covered by the Financial Services Compensation Scheme (FSCS), protecting individuals if their pension provider fails.
  • If your SIPPS provider goes bankrupt, your investments are usually safe as they are held separately from the provider’s assets, and the FSCS can provide compensation.

In This Article, You Will Discover:

    At Every Investor, our experts understand that the choice and flexibility available with a SIPP may present a number of potential pitfalls.

    We’ve compiled this guide to help you discover the safeguards available to SIPP customers so you can mitigate the risks associated with your retirement plans.

    What’s a SIPP?

    SIPPs grant individuals the autonomy to decide how their pension funds are invested, offering a self-directed and potentially more lucrative path to retirement savings.

    Are you wondering if SIPPs are safe to include in your retirement strategy?

    In a 2022 report, the Financial Services Compensation Scheme (FSCS) noted that individuals are expected to make increasingly sophisticated decisions about their retirement savings,1 which may include a self-invested personal pension (SIPP).

    Making complex decisions can be a source of worry, especially when it comes to your money and your hopes of enjoying a comfortable retirement. 

    SIPPs, or Self-Invested Personal Pensions, offer flexibility and control over investment choices, but they aren’t without risks. 

    Understanding these risks, from the stability of the provider to investment volatility, is essential for anyone contemplating a SIPP as part of their financial future.

    How Much Risk Do SIPPs Carry?

    Self-invested personal pensions (SIPPs) indeed offer attractive benefits such as flexible investment options and tax efficiency, but they’re not without risks.

    Key among these is the potential volatility of investment returns.

    With SIPPs, your retirement fund is directly exposed to the fluctuations of the market.

    Furthermore, the management of a SIPP requires a good understanding of investment, increasing the risk of poor decision-making for the less financially savvy.

    On the safety side, SIPPs are regulated by the Financial Conduct Authority (FCA) in the UK, providing a degree of protection.

    However, the safety net does not extend to poor investment performance or loss due to market fluctuations.

    Moreover, while SIPPs allow for higher-risk investments, such as unregulated collective investment schemes, these are not covered by the Financial Services Compensation Scheme.

    Thus, the safety of your SIPP heavily relies on your investment choices and market performance.

    SIPPs carry varying levels of risk, depending on the investment choices made within the SIPP. 

    Investing in stocks and shares may offer higher returns but comes with more significant risks, while bonds and gilts may be more stable but offer lower potential returns. 

    The risk’s also influenced by the provider’s stability and underlying economic factors. 

    Ultimately, the risk associated with a SIPP can be tailored to an individual’s risk tolerance, but it requires careful planning and consideration.

    Remember

    Past performance of the investments you choose to include in your SIPP isn’t a reliable indicator of future returns, especially if you invest in anything other than cash. 

    What Kind of Risks Do SIPPs Carry?

    The kind of risks SIPPs carry can be divided into investment, provider, and theft or fraud risks. 

    Let’s take a quick look at each type:

    • Investment risks: Stocks and shares can be volatile and are subject to market fluctuations; bonds and gilts carry lower risk but can be affected by interest rate changes, and real estate comes with illiquidity risk and market dependency.
    • Provider risk: The risk that the SIPP provider could go out of business or fail to adhere to regulations, which may result in a loss of investment.
    • Risks of theft or fraud: The potential for criminal activities such as unauthorised access or investment scams, which could result in significant financial losses.

    Understanding these risks is crucial if you’re considering investing in a SIPP, as it informs decision-making and helps to create a strategy that aligns with your risk tolerance.

    Before you decide to hide your cash under the mattress instead, let’s discuss how your SIPP investments are protected. 

    Are SIPPs Regulated?

    Yes, SIPPs are regulated by the Financial Conduct Authority (FCA)2 and protected by the Financial Services Compensation Scheme (FSCS).3 

    The FCA

    The FCA’s the regulatory body responsible for ensuring that financial markets operate honestly, fairly, and effectively. 

    This means that SIPP providers must adhere to a set of rules and guidelines to protect consumers and maintain a stable financial market.

    The FSCS

    The FSCS is an independent body funded by levies on authorised financial services firms. 

    It provides protection for consumers when a financial services firm fails or is unable to meet its obligations, such as paying out pension benefits or returning investments. 

    The FSCS compensation limits for SIPPs are £85,000 per person, per firm.4

    Of course, how safe your SIPP is also depends on the investments you choose.5 

    Why’s that important? 

    The FSCS can’t protect your investments from the ups and downs of financial markets; however, if your SIPP provider’s made poor investment choices, you may be covered by the FSCS.

    In other words

    If the funds within your SIPP underperform and your provider doesn’t default, you may not be compensated by the FSCS. 

    Are All SIPPs Protected by the FSCS?

    No, not all SIPPs are protected by the FSCS.

    In a 2022 report, the FSCS noted that 40% of UK pensions customers haven’t verified that their SIPPs are covered by FSCS protection.6

    If your SIPP’s not protected in this way, there’s a chance that you could lose the money held in your investments.

    In addition

    While registered SIPPs are protected by the FSCS, the extent of the cover varies depending on the types of investment held in your SIPP.

    Non-standard, high-risk, and illiquid investments (i.e. ones that can’t be sold quickly7) aren’t typically regulated by the FCA and, as such, won’t be protected by the FSCS.

    How’s Your SIPP Protected by the FSCS?

    The FSCS protects your SIPP by paying you a set sum of money if your FCA-registered SIPP provider goes bust and can’t compensate you on its own.

    Important to note

    The FSCS only compensates individual customers.

    If you’ve combined your investments with other people in a group or family SIPP and your SIPP provider fails, your FSCS compensation could be affected.

    Here are some important facts about FSCS protection:

    • In 2023, FSCS compensation’s capped at £85,000 per person per fund.8
    • If your authorised SIPP provider fails, your compensation will automatically be paid out to you provided an FSCS investigation confirms that your provider can’t reimburse you on its own.
    • FSCS protection’s free to you, the customer, as FSCS charges are levied on the financial services industry.
    • FSCS compensation’s usually untaxed, except when it comes to interest you receive from the defaulting provider, as this may be taxable.
    • SIPP providers that defaulted before 28 August 1988 may not be covered.9
    • Your FSCS compensation may be impacted by the type of provider that managed your SIPP as well as the investments held within the SIPP.

    Are SIPPs Insured?

    SIPPs can be insured or uninsured and can be referred to as insurance-backed or non-insurance-backed.10

    Insurance-backed SIPPs are provided by UK-regulated insurance providers and enjoy FSCS protection if they qualify as contracts of long-term insurance.

    You can check whether your SIPP’s insurance-backed or not by using the Pension Protection Checker tool available on the FSCS’s website.

    Your SIPP & the Financial Conduct Authority

    Before you set up your SIPP, you should access the FCA’s Financial Services Register to confirm that the SIPP provider’s duly authorised.

    An authorised SIPP provider typically holds your money in trust, separate from its own funds.11

    These FCA rules and regulations ensure your money’s safe from your SIPP provider’s creditors, should the firm go bust.

    What Happens if My SIPP Provider Goes Bust?

    If your SIPP provider goes bust and it’s authorised by the FCA and protected by the FSCS, you can claim up to £85,000 in compensation from the FSCS if you were still contributing to your SIPP when the provider defaulted.12 

    If you’re retired and have purchased an annuity with your SIPP, you can claim 100% of your remaining funds if your provider goes bankrupt.13 

    What Happens if I Don’t Know Who My SIPP Provider Is?

    If you don’t know who your SIPP provider is, you can use the government’s free pension tracing service.

    Before accessing this tracing service, gather as much of the following information as possible:

    • The name of your previous employer
    • The type of business it was (or still is)
    • The address of the company
    • When you started employment
    • Any old pay slips.

    What’s a Mis-Sold SIPP?

    A mis-sold SIPP’s a product that was sold to you without proper regard for the rules, regulations, and guidelines set out by the Financial Conduct Authority.

    You may be dealing with a mis-sold SIPP if:

    • The pensions advisor didn’t clearly explain the risks involved with a SIPP to you. 
    • The pensions advisor didn’t fully take into account your personal circumstances.
    • Your age was unsuitable for the SIPP product and the investments it held. 
    • The pensions advisor didn’t explain how and where your money would be invested. 
    • The pensions advisor didn’t carry out an in-depth fact-finding exercise to obtain a clear picture of your financial circumstances and saving goals. 
    • The pensions advisor didn’t consider your investment risk profile.
    • The pensions advisor didn’t explain the specific nature of each investment held in your SIPP, particularly if they were unregulated, high-risk, and speculative.

    Examples of unregulated, high-risk, and speculative investments include the following:

    • Luxurious overseas resorts and properties owned by companies facing substantial financial loss because the properties weren’t built or the projected profits were grossly exaggerated. 
    • Storage units and parking spaces that guaranteed rental income when the market demand was exaggerated.
    • Farmland and forestry schemes that didn’t prove financially viable.

    It’s essential that you act swiftly if you wish to make a claim for a mis-sold SIPP as there are strict time limits that apply; however, an authorised pensions advisor will be able to guide you through the claims process. 

    How Can a Pensions Advisor Help Safeguard My SIPP?

    A pensions advisor can help safeguard your SIPP by helping you decide how and where to invest your money safely.

    An independent pensions advisor registered with the Financial Conduct Authority can guide your investments appropriately according to your risk profile.

    They’ll also ensure you only deal with SIPP providers and products that are regulated and protected to mitigate the risks associated with self-invested personal pensions. 

    The FSCS recommends that you ask your pensions advisor the following questions before setting up a SIPP:

    • Are you authorised by the Financial Conduct Authority?
    • Does the Financial Services Compensation Scheme protect the financial advice you give me? 
    • Are all the SIPPs you advise me about protected by the FSCS if the provider fails?
    • Does the FSCS protect my SIPP?
    • How much of my SIPP’s protected?
    • What would happen to my SIPP if something happened to your business or the SIPP provider went bust?
    • What other protections are available for this SIPP?
    • Am I still protected if I buy an annuity?
    • What if I buy other products with my SIPP?
    • If I move money into this SIPP from another pension, will those funds also be protected?14

    Remember

    You can access the FCA register to check if a financial or pensions advisor’s authorised and legitimate.

    Common Questions

    What Measures Ensure the Safety of SIPPS?

    How Reliable Are SIPPS for Retirement Planning?

    Are There Any Risks Involved with SIPPS?

    Are SIPPS Protected by the Financial Services Compensation Scheme?

    What Happens to My SIPPS If My Provider Goes Bankrupt?

    What Are the Safest Investments for My SIPP?

    What Are High-Risk SIPP Investments?

    Can I Change My Mind and Cancel My SIPP?

    In Conclusion

    SIPPs are an attractive and established means of saving towards your retirement while enjoying more flexibility and control over how, where, and when your contributions are invested.

    Such freedom does pose more risk to your money as there’s no guarantee that you’ll enjoy higher returns on your investment.

    It’s paramount that you consult an authorised independent financial or pensions advisor to mitigate the risks associated with investments and ensure your SIPPs are as safe as possible. 

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