Would I really lose all but £85,000 of my £1million pension pot if my DIY investing platform goes bust?

Could you clarify the risks workers are exposed to if their pension provider or platform company fails.

I have a self-invested personal pension with a large online investing platform. The value is over £1million and a separate pensions management company suggested to me it was at risk if the platform company goes bust.

Whilst I fully understand the risk of my individual investments and have experienced swings of £100,000 over a few months, I was not aware that I could lose the pension if the platform company failed.

© Provided by This Is Money Risk aversion? Would I lose all but £85k of my £1m pension if the online platform provider goes bust? (Stock image)

It was suggested to me by the rival provider that protection would be limited to the Financial Services Compensation Scheme limit of £85,000.

I think it would be useful for the public to fully understand risks of pension providers separate to underlying investment risks.

What would be your advice to limit any risks? Would it be prudent to spread risk by fragmenting your pension between providers?

Should we also consider further fragmenting between fund management companies, even if we focus on duplication of the shares or segments within funds, not from an investment risk perspective but again from a fund company default risk perspective?

I previously consolidated my lifetime accumulation of defined contribution workplace pensions into my Sipp to minimise platform costs and maximise investment choice options.

Tanya Jefferies, of This is Money, replies: Risks to pensions and investments if providers go bust are not nearly as well understood as those posed to cash savings in the same scenario. This is Money’s Editor, Simon Lambert, explored this topic with his call for better protection for Isa and pension investors. 

DIY investing platforms hold customer money separately from their business funds, which should mean it’s safely ringfenced if they go bust.

One thing that worries people though is that mismanagement – or fraud in the worst case scenario – can occur if a firm gets into financial trouble.

Who protects your pension and what happens if your scheme goes bust? 

The Financial Services Compensation Scheme explains its role here. 

Meanwhile, platforms hold customers’ investments in pooled nominee accounts, so investors no longer have paper certificates identifying their individual stakes as they traditionally used to. 

Having hard proof tends to give people more peace of mind.

The not-for-profit shareholder organisation ShareSoc is pushing for individual digital ownership, which would give people voting rights and a personal record of what they hold.

However, in practice platforms can identify who owns what in a pooled account, and so this shouldn’t be an issue if they go out of business.

When it comes to spreading your holdings between platforms, as you suggest above, this works fine for Sipps as you can have as many as you want.

It’s a bit more complicated with Isas, because you can only pay new money into one each year. You can trade buy and sell investments within them in that year though, and the annual Isa allowance is £20,000, which is well within the £85,000 FSCS limit.

Also, you can move old Isas around, although not all firms will allow partial Isa transfers. With some investment platforms an Isa transfer is all or nothing.

In answer to your question, a platform expert explain the risks in detail below. 

Mark Polson, founder of platform research business The Lang Cat, replies:  The first thing to say about the investor protection landscape is that it’s incredibly complex.

Much depends on how you hold your money, and what the arrangements the company you hold it with makes in turn.

© Provided by This Is Money Mark Polson: ‘The fact that £85,000 is protected doesn’t mean that’s all you would get back if a firm fails’

The pension management company you spoke to is technically right in some respects, but there’s more nuance in it than they appear to have suggested. I suspect they may be after your business.

You have various lines of defence in terms of investor protection.

The main one, and the reason that you may feel that it’s worth sticking where you are, is that it is absolutely not the case that if your platform ceases trading that you will automatically lose £915,000.

Another safeguard, which doesn’t apply to you but might reassure other readers, is that if a ‘life event’ leads to you having a temporarily high balance of up to £1million and something goes wrong within six months of you making the deposit, you may be able to get protection up to that amount. 

To explain: 

What happens if an investing platform goes bust?

At the highest level, if your online investing platform fails and if there isn’t enough working capital to ensure that it can wind down in an orderly fashion, then the Financial Services Compensation Scheme will step in and protect you to the tune of 100 per cent of the first £85,000 of your assets.

With over £1million invested, that obviously doesn’t sound great.

However, there’s more going on than meets the eye. First of all, the fact that £85,000 is protected doesn’t mean that’s all you would get back if a firm fails.

Customers’ money is held separately to the platform’s own cash and should still be there even if it goes out of business, assuming fraud is not involved.

Your investment platform is also required to hold capital in reserve, in case it runs into cashflow problems and has to stop operating.

This is called ‘capital adequacy’. You can generally find details about this on platforms’ websites.

The money isn’t there to make up for any investment losses, or if a fund manager goes out of business. It’s there to pay for the costs of shutting up shop.

If there isn’t enough capital adequacy to pay for those costs – such as the costs of administrators – then those administrators can take a charge over the customer money held by the firm to ensure they get paid.

That’s when the FSCS steps in – if the end position after the costs have been recovered is that clients would get back less than 100 per cent of their assets up to £85,000 then the protection is triggered.

If you would get more than £85,000 back anyway – as would be highly likely for someone with over £1million in a major platform – then the protection doesn’t do anything for you.

In the highly unlikely situation that the costs of winding up were so great that a huge proportion of the client assets were exhausted – remembering that some of these platforms look after tens of billions of pounds of client investments – then you would qualify for protection under FSCS.

What happens if an investing platform’s bank collapses?

There are other wrinkles here. The protection I’ve just described works if the platform itself goes out of business. But the platform isn’t the whole story.

Any cash you hold on the platform will normally be spread across a range of banks.

If any of those were to fail then you would have protection under FSCS in the normal way for banks – which is to say that £85,000 would be protected across your whole holdings with that bank.

That includes any money you happened to have deposited separately in an account with that particular bank.

What happens if a fund manager you’re invested with goes bankrupt?

We also have fund managers to think about – they can hit problems too.

Again, you get FSCS protection here if it’s an authorised UK collective investment. If a fund you invest in does go bust, the platform will work to arrange the return of the correct amount of asset to you. 

This is one of the reasons most investors should be very cautious about unregulated investments such as minibonds, which promise high interest rates but have little to back them up.

What isn’t covered is when a fund manager invests in a company which then goes bust! That falls under investment risk, and is part and parcel of investing.

What can investors and pension savers do to protect their money?

It’s not a practical solution, but if you want to remove risk completely, there’s only one thing to do.

You need to spread your investments in terms of not only venue (platform) but also fund management group so that there is no more than £85,000 in any one, and also ensure that any cash the platform holds isn’t in a bank in which you also have over £85,000.

I can’t give you advice, but a more viable option if you want to reduce rather than remove risk is to consider sticking to large institutions with a lot of free capital over and above the regulatory minimum.

You can find out who has what by checking the ‘Pillar III Disclosure’ on each platform’s website. You could even consider splitting across two or three of these larger institutions if that helps you sleep easier.

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