How safe is your Sipp?

All of us want to be certain that our retirement savings are safe. Unfortunately, sometimes investment firms collapse as happened last month, when European Pensions Management Limited (EPML), a relatively small but well-regarded provider of self-invested personal pensions (Sipps) went into administration (see below). So how big a risk could something like this pose to your pension?

Pension provider failures are rare and they should hopefully become rarer: the Financial Conduct Authority, the UK's financial services regulator, is tightening the rules for Sipp providers, requiring them to hold more capital to provide an extra layer of security for savers.

However, even before these new rules come into effect in September this year, "people with their money in a Sipp should be protected", says Mike Morrison of AJ Bell, one of the largest Sipp administrators. That's because the Sipp provider must keep clients' assets separate from its own money, which means that they can't be taken by creditors if the firm becomes insolvent.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

The only situation in which you are likely to suffer losses is if the Sipp provider has broken the rules and held client money in its own accounts. If this happens, clients should have some protection under the Financial Services Compensation Scheme (FSCS), the statutory scheme that compensates customers of authorised financial services firms if they fail and are unable to pay claims against them. The level of this protection varies depending on what kind of pension you have.

Compensation for losses in trust-based Sipps such as those offered by providers such as AJ Bell and Hargreaves Lansdown is capped at a maximum of £50,000, like most investment products. Pensions run by insurance firms have no cap on potential compensation if you are invested in funds run by the insurer (since they count as insurance contacts for FSCS) but they typically offer less flexibility.

Even though Sipp provider failures are rare, if you have a trust-based Sipp that's well over the FSCS limit, it's safest to stick to large, solid providers. If you want to use smaller firms, consider splitting it into smaller pots held with different providers to ensure it's fully protected by the FSCS in a worst-case scenario.

What next for EPML?

If you're one of the 6,000 savers who hold a Sipp, individual savings account (Isa) or other account with European Pensions Management Limited (EPML), you're likely to be concerned about the safety of your money. Fortunately, while details of what caused the firm to go into administration are not clear, it doesn't currently appear that there was anything untoward.

The FCA has published a note stating that "the majority of client money is in place as required". This is expected to be confirmed shortly by the special administrators, Smith & Williamson. In the event that some money or assets are missing, clients will be covered by the FSCS, as outlined on this page.

So what's likely to happen now? The administrators will look for a buyer to take on EPML's clients, which is unlikely to be difficult. "Lots of other companies are looking to buy books of business," says AJ Bell's Mike Morrison. The administrators say that they have already had a number of enquiries from prospective acquirers and if a deal can be agreed with one of them, it's likely that all client assets will be transferred as part of this deal. When providers fail "it generally ends up with a safe transition from one provider to another", says Morrison.

If you have funds invested with EPML and would like to transfer them to another provider, this should be possible (subject to your contractual agreements). However, bear in mind that the administrators will be busy and the transfer may take longer than usual. Unless you need access to the funds sooner rather than later, you may be better waiting for the administrators to secure a buyer. For further details, see the administrator's website.