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Our resident pensions expert explains the compensation rules
Thursday 30 Apr 2020 Author: Tom Selby

I have more than £85,000 in cash in my SIPP at the moment. What is the risk of holding money beyond this threshold?

A reader    


Tom Selby, AJ Bell Senior Analyst says:

The reason £85,000 is an important number for savers and investors to remember is because it is one of the key Financial Services Compensation Scheme (FSCS) limits.

The FSCS is a lifeboat fund which pays out compensation if the institution with whom you are saving or investing goes bust or you receive bad advice from a regulated adviser. There are different levels of compensation in place depending on the type of investment you make.

Anyone who buys an annuity – a product which pays a guaranteed income for life – from an insurer which subsequently fails, for example, enjoys 100% protection.

Cash in a bank, building society or held within a SIPP is covered up to £85,000, as are investments held with an FCA-regulated fund manager.

There are a couple of key things you should be aware of in relation to this compensation limit.

Firstly, the £85,000 relates to the financial institution which ultimately holds your money. So if you invest in a fund via a platform such as AJ Bell Youinvest, then you will be covered up to £85,000 if the fund manager goes bust.

Equally, if you hold cash in your SIPP then the £85,000 relates to the bank or building society your SIPP provider uses. Just ask your provider if you are unsure.

Note in relation to deposits held with banks or building societies that some institutions will have multiple brands. The compensation limit only applies per institution, so it’s worth checking which institution is behind whoever you bank with to ensure you are maximising your compensation entitlement.

Secondly, FSCS protection only applies where you invest either via a regulated adviser or in a regulated product. Anyone who invests outside these parameters is therefore at risk of not being covered in the event something goes wrong.

WHAT HAPPENS IF MY PLATFORM GOES BUST?

If the platform you are using goes bust this shouldn’t result in you losing money. This is because a platform doesn’t usually hold your money directly – instead it provides a low-cost route for you to invest in things like stocks, funds and bonds.

It is these end investments where the FSCS protection kicks in (provided they are eligible), which is one of the reasons doing due diligence is so important.

However, where your platform goes bust and there are problems finding your end investments the costs of doing this could potentially come from your funds. This is unlikely to be the case when you’re investing in regulated funds, but it’s still worth checking the financial stability of your provider, including how much cash they hold in reserve.


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Please note, we only provide guidance and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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