After the credit crunch, the run on the Northern Rock and the instability of other financial institutions savers have understandably become more concerned about the security of their savings accounts.
Go into almost any bank or building society, or indeed visit their website, and there are at pains to point out that savings held with them are secure; often pointing savers to the Financial Services Compensation Scheme (FSCS) website.
But SIPP deposit account investors looking for confirmation on the FSCS website that their savings are protected will be left disappointed. Whilst there are specific sections explaining the protection offered to personal and business savers, SIPP deposit accounts get no mention whatsoever.
With the website singularly failing to provide information to SIPP deposit account investors the next option is to pick up the phone. We’ve done this; to say the answers we received were vague is an understatement.
As publishers of the most in-depth SIPP deposit account best buy table currently available we felt it was important for us to confirm, with the FSCS, exactly what the compensation arrangements are for SIPP deposit accounts.
We therefore contacted the FSCS and received the following replies:
Investment Sense (IS): Can you confirm that cash held in a deposit account is protected by the FSCS (assuming of course that the bank or building society is covered by the scheme)?
Financial Services Compensation Scheme (FSCS): Yes, cash on deposit within a SIPP is covered by FSCS.
IS: Is the level of cover the same as for an individual?
FSCS: Yes, subject to the usual £85,000 per person per firm limit
IS: Can you confirm that any money held personally will be aggregated with money held by the SIPP when testing against the £85,000 limit?
FSCS: Yes, we would aggregate and cap if necessary across the SIPP entitlement and any other accounts with the same firm
IS: In the event that a bank or building society becomes insolvent can you confirm what the requirements of the FSCS would be to pay a claim?
FSCS: In the event of the failure the firm would provide us with details of the SIPP account, this would not be included in the SCV (Single Customer View) file and therefore not part of the straight-through payout.
We would need to contact the account manager (likely to be the SIPP package provider in most cases) with whom the firm corresponded to establish who the SIPP funds belonged to, do our eligibility and cap if necessary, before we could make payment.
The payment would be made to the SIPP manager/administrator who could then reinvest it in a similar product.
Update: 21st February, FSCS to update their website
Following intervention by FT Money, who picked up on this story and contacted the compensation scheme, the FSCS has agreed to update their website to make information on the protection arrangements for deposit accounts in SIPPs more prominent.
We are delighted the FSCS will be making these changes, which will help to reassure thousands of SIPP investors.
The FT Money article can be read by clicking here.
Pitfalls to avoid
Although brief, the answers do at least confirm that the FSCS covers deposit accounts held in SIPPs. There are clearly though some pitfalls SIPP deposit account investors need to avoid:
Which compensation scheme? Not all the banks on our best buy table for SIPP deposit accounts are covered by the FSCS. Savers should take care to confirm which scheme is applicable and whether or not they are happy with scheme’s rules and compensation limits.
Aggregation of assets. The FSCS covers up to £85,000 per person, per institution, with any money held via a SIPP being added to money held personally, before being tested against the maximum level of compensation. For example, if you hold £50,000 personally with a particular bank, only a further £35,000 would be covered if your SIPP opened a deposit account with the same bank.
Compound interest. Longer term fixed rate are still popular options for SIPPs, but be careful, if you invest £85,000, the maximum covered by the FSCS, any interest which you receive and is subsequently added to the account, will be above the limit and therefore not covered. If you want all your savings protected invest a smaller amount, so that both your original capital and interest will be covered.
Multiple brands under one banking licence. The FSCS covers authorised institutions, which in some instances can include more than one brand. For example the Halifax’s banking licence covers the AA, Bank of Scotland, Birmingham Midshires, Intelligent Finance, and Saga brands, meaning that only £85,000 per person is covered across all the brands. Conversely Cater Allen, which is owned by Santander, has a separate banking licence, meaning that up to £85,000 is covered with each institution.
Our team of Independent Financial Advisers in Nottingham are experienced in advising SIPP investors on their cash options, if you would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email firstname.lastname@example.org