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Sipp security

Two weeks on from the first reports of HMRC’s move to wind up the Freedom Sipp and the picture of what happens when a Sipp provider goes to the wall is now becoming clearer.

At the same time, questions are being asked about the disparity between the consumer protection offered to non-insured Sipp investments compared with those of regular personal pensions. First of all, the Freedom debacle. The matter has been adjourned for two weeks on grounds of its complexity but in the event that HMRC does succeed in its winding-up application, it would mark the first-ever collapse of a Sipp provider in the UK.

Most of the company’s clients need not panic as it now seems clear that the FSA and HMRC have no intention of penalising Freedom investors just because their provider has got into difficulties.

The message from the FSA in its letter to Freedom investors that they could face a 40 per cent tax charge in the event of Freedom’s deregistration, appears to be designed to urge action rather than act as a prelude to enforcement.

I understand from sources close to the investigation that the FSA’s intention is, in conjunction with the HMRC, to make sure there is an orderly handover of Freedom Sipp clients to other providers.

Some Sipp experts had been questioning whether the winding-up process would lead to a vacuum, with no Sipp provider technically in place. But I understand that between them, the FSA and HMRC are arranging for a specialist administrator to be put in place, with the power to act in the capacity of a Sipp provider in the event that the appli- cation to court succeeds.

That is not to say that Freedom Sipp investors have not had their fair share of woes. The restrictions on cash movements have meant that some investors are unable to access drawdown pension payments or pay interest on loans or expenses on commercial properties. Nor have they had statements confirming how much they hold.

The security of Sipps has been getting coverage in the media lately and not just limited to small niche players investing in assets outside the mainstream. Stories in the press have pointed out that Sipps offer less consumer protection than regular pension products.

Ten years ago, virtually everybody was in personal pensions with full insurance protection. Today, hundreds of thousands of consumers have less protection through the FSCS because they opted for Sipps. All funds in personal and stakeholder pensions are insured and therefore benefit from FSCS cover of 100 per cent of the first £2,000 and 90 per cent cover for the rest but non-insured Sipp investments only get cover up to £50,000 for cash and £48,000 for investments.

Don’t put all your eggs in one basket is rightly the most important tenet of financial advice and it is one that cash investors have taken to heart in relation to banks since the market tremors of a year ago. But I wonder where this caution will ultimately take us.

Investment assets held in Sipps are held in trust. Even the fund managers themselves are not custodians of the assets held by the clients – that job is performed by a handful of global banks. Sipp investors in unit trusts enjoy the same protection limits as those investing outside a Sipp wrapper. So should we in future restrict holdings with any one fund manager to £48,000?

John Greenwood is editor of Corporate Adviser

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