SIPPs – the risks and the benefits

Most pension money in Self-Invested Personal Pensions is completely safe. It grows with the underlying investments and is ready to be taken out when you need it – but it isn’t always rosy in the SIPP garden.

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Danger of theft

Because the pension fund is yours to invest as you like, it attracts thieves like bees round a £300bn honeypot. There is nearly £6bn of SIPP money in what are called non-standard investments. They are high risk and often ‘illiquid’ – meaning that when you want to sell there is not a ready market and it may take a long time or be very difficult to do so at all.

Many of these non-standard investments are not regulated by the Financial Conduct Authority. They include commercial property, residential property in the UK, wine or whisky, car parking spaces, storage units and shipping containers.

Other types of high-risk investments include property abroad, overseas forests or agriculture that is often branded ‘green’ or ‘ethical’, cryptocurrencies or obscure financial instruments such as foreign exchange or carbon trading.

Many people have been conned by investments in a new material called graphene or the so-called rare earth metals that are used in electronics. Most of these offers are scams. All are so risky that you may lose some or all of your money.

Thieves who want your SIPP money will often start by offering a free ‘pension review’. They may tell you that unregulated investments will produce higher returns, but to do that you should let them put your money overseas outside the reach of UK regulation. Such offers should always be rejected out of hand. They will normally result in losing all your money. They are not regulated in the UK and you will usually find you cannot get any redress if things do go wrong.

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When is SIPP compensation an option?

However, in certain cases there may be some protection. If you take advice from a regulated financial adviser, then you can seek compensation from them if they recommend an unsuitably risky place to put your pension fund. In addition, SIPP providers who administer the SIPP also have an obligation to ensure that any investment
it allows for your pension fund fulfils basic standards of safety and honesty.

If you make a complaint that is not dealt with to your satisfaction, you can go to the Financial Ombudsman Service. It gets a growing number of SIPP complaints – more than 2,000 in 20187-18 – and it upheld more than half in the customer’s favour. It can order compensation.

If an investment turns out to be a scam or the SIPP firm goes bust, then you may be able to get redress through the Financial Services Compensation Scheme (FSCS).

In January the FSCS declared three SIPP providers in default after they allowed customers to invest in storage pods, oil fields, diamonds and overseas property. FSCS compensation has a limit of £50,000 for each investment claim (rising to £85,000 to match cash deposit claims from April 2019), so you still may end up losing money. If you seek compensation from your adviser but it goes into administration, the FSCS will step in, but again compensation cannot exceed £50,000.

A recent campaign by The Financial Conduct Authority to help people keep their pension safe found that the average loss among the cases it looked at was £91,000 – far more than the compensation limit even if any compensation were available.

If you do not use a regulated financial adviser, then there is no access to the compensation schemes. If a firm that is not regulated advises you to take your money out of a safe, UK-regulated pension and give it to them, you can lose it all.

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Looking after your SIPP

Most money in SIPPs is safe, protected and sensibly invested within the UK. If you choose to pick your own investments, remember that past performance is no guide to the future. Something that has done spectacularly well may fall just as quickly. The one thing you can control is cost. There are now some very low-cost ways of investing, tracking the stock market with annual charges of less than
a tenth of one penny for each pound invested.

You can take money out of your SIPP once you reach the age of 55, though many will make exit charges. If you take out more than a quarter of the money, then income tax will be deducted before you are paid. That will usually be at a high rate and you may have to claim the extra tax back later in the tax year.

You can pay into a SIPP until you are 75. If you are a basic-rate taxpayer, every £100 you pay in out of your taxed income will have £25 added to it. If you are a higher-rate taxpayer, you can then claim back another £25 when you do your tax return. That means you only spend £75 to have £125 in your pension – quite a bargain.

There are strict limits to the amount you can save into your pension. Normally it is £40,000 in the year, but if you have taken money out of it already – apart from the tax-free amount – the limit is just £4,000. There is also a lifetime limit of £1,030,000 in all your pension funds added together. That may sound a lot, but it would buy an index-linked pension of only around £29,000 a year.

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