Moret calls for simplification of SIPP compensation

Financial Services Compensation Scheme (FSCS) coverage for SIPPs is overly complex, and should be simplified to make it easier for advisers to understand, according to John Moret.

The issue of compensation for SIPP investors has been thrown into the spotlight recently, following the collapse of Freedom SIPP, which went into administration last week.

John Moret, director of sales and marketing at Suffolk Life, says the situation is confusing, and needs to be looked at urgently.

"FSCS protection for SIPPs is overly complicated," he says. "You have different rules for different wrappers, and then a whole range of different coverage depending on the assets held in the SIPP."

Under current FSA rules, protection for the SIPP wrapper itself varies, with those set up as trusts not receiving any protection, while insured SIPPs benefit from 100% cover for the first £2,000, and 90% protection on remaining funds with no upper limit.

However, Martin Tilley, business development manager at Dentons Pensions Management, says the protection of the underlying assets is the most important aspect for investors to consider.

"If a SIPP provider goes out of business, then the assets within the SIPP still exist, and can usually be transferred to another provider fairly easily.

"The assets within the fund are where any real risk lies, and investors need to consider the different levels of protection available when making investments."

Insured funds held within a SIPP benefit from the same protection as an insured wrapper, cash holdings have the same £50,000 limit as normal bank accounts, while investments have an upper compensation limit of £48,000.

Moret says the FSCS needs to reform the system to make it easier for investors to understand, but Tilley believes it will not be easy to reach a consensus.

"In terms of the SIPP wrapper, you either need to force all SIPPs to operate as insured funds, which will cause a lot of upheaval as much of the market uses the trust model.

"The only other option is to bring trusts under the FSCS, but there are thousands of small trusts out there, and many of them will not like the idea of paying levies to a compensation scheme."

Tilley says a uniform compensation arrangement is unlikely, and advisers and investors will need to ensure they know all the risks involved. Those with large cash holdings in particular should consider diversifying with different banks to protect as much of their money as possible.