Unfortunately there is no easy answer to this one. It depends on what kind of pension you have.
Why is it so complicated?
For many people, intuitively pensions are investments; so one might expect them to be covered under FSCS up to the £50,000 investment limit. The good news is that this is in fact your worst case scenario. THE FSCS considers many pensions as long term insurance contracts and thus covers them up to the 100% it allows to certain insurance products. Unless you are seeking compensation for poor advice. If you have been poorly advised (for example to move a pension inadvisably) and have a claim on the FSCS then the advice is deemed to be investment advice and thus has a £50,000 limit. This of course doesn’t make any sense. But since this means there is more cover in some instances and not less we’ll not quibble!
So which pensions have this extra cover? The principle is that if your pension (either the accruing pensions or the eventual annuity) is a long term insurance contract from a UK life insurance company (think the likes of Scottish Widows, Standard Life, Aviva etc) then it is probably covered for the full 100%. However if your pension is a SIPP that exists to provide a wrapper in which to hold a diverse range of investments then it is considered an investment, as are the underlying investments and the FSCS would apply the investment limits. The problem is that the nomenclature (personal pension, SIPP etc) is not universally applied to mean exactly the same thing so we can’t tell you that personal pensions benefit and SIPPS don’t.
Now, having said all that, there is the principle and then there is the practice. The FSCS might cope paying 90-100% of such claims if a small firm were to fail, but realistically if one of the names above were to fail we would be in a fairly unique situation (Equitable Life was small by comparison!) and might see some divergence between what is promised and what can be acted upon. Fortunately such a scenario is unlikely.
Stakeholder Pensions, Personal Pensions & ordinary annuities
Generally contracts given these names are of the long term insurance contract type and most likely to be covered up to 100% of their value.
Employer Sponsored Pensions – including ongoing pensions in payment
And the complications don’t stop there. If you have an employer sponsored pension (such as a defined benefit scheme) these are covered by the Pension Protection Fund which has a different set of rules. This scheme differentiates between scheme members that are retired at the point of claim and those that aren’t and aims to pay those in retirement 100% of their income, and those yet to retire 90% of their future benefit, subject to a cap. The cap at age 65 is, from 1st April 2016, £37,420.42 (this generally moves upward annually with inflation).
NEST & Trust Based SIPPs
In theory, these pensions hold member’s assets in individual trusts, so even if the provider (NEST or otherwise) were to go bust there should be no impact on the ownership of the assets. Hence the FSCS only really comes into the picture in relation to the investments these pensions hold and in that scenario as we discussed earlier they are deemed investments and have the relevant £50,000 investment limit.
The most important consideration here is that just the fact you are being auto-enrolled does not tell you which of the types of pension above you are being auto-enrolled into. Many different pension types meet the criteria for a pension to be suitable for auto-enrolment. Having said that, you should in the written material you are provided with at the point of enrolment find some mention of either the FSCS or the Pension Protection Fund which clarifies the degree to which the product is covered.
By Philip Hamer of Westminster Wealth Management LLP. WWM LLP is authorised and regulated by the Financial Conduct Authority (490519). In May 2015 Westminster Wealth Management LLP was awarded the prestigious Chartered Financial Planners title by the Chartered Insurance Institute (CII). The information given is based on current rules, which are subject to change. The content should not be considered to be financial advice or the endorsement that a particular course of action is suitable to all readers.