FSCS says they cover 100% of consumer money if annuity company goes bust, is that true !?

AustinZ

I think most people will be concerned with giving all their pension money to a company for ever and never have access or control over it again - and trust them to manage it properly for 20 or 30 or more years.

So I read about this and in one hand I read FSCS covers the money 100% with no top rate limit, but in other reports I read the insolvency practitioner look at what money is left in the fund and decide compensation... !!!

Now this latter is quite a concerned, because obviously a company goes bust when they managed their funds badly or the market has gone against them, that means not much left in the fund ...!?

So I had a long chat online with FSCS support and first she said the mismanagement compensation is different and only covered to £85k. Also they do not cover market or product performance. So this to me does not sound like 100% coverage, does it !?

When I pressed more then she said we see how much of your annuity money is paid out and calculate the remainder and compensate the consumer using the standard annuity calculation. Now this makes more sense and somewhat acceptable, but the other bits don't. What do you guys thing !?

Oh, she also said since 2008 when FSCS was established, they did not have to bail out any annuity or pension company - though as they always say in finance, past  performance are no indication of future results !

Be honest I guess if the market goes totally pear shaped, in case of serious catastrophe or economic disaster, any money invested in SIPP or ISA probably disappear and good luck running to the banks for any savings. But mismanagement is still a concern.

Doctor_Who

The FSCS website is 'undergoing maintenance' at present, but PensionBee says the following:

Generally, the FSCS can protect pensions that are provided by UK-regulated insurers, as long as they qualify as ‘contracts of long-term insurance’. A common example is an annuity, where you exchange the cash in your pension for a regular income from an insurance company. Where the FSCS can pay compensation, they will cover the pension at 100% with no upper cap.

https://www.pensionbee.com/pensions-explained/pension-rules/what-is-the-fscs

Albermarle

So I had a long chat online with FSCS support and first she said the mismanagement compensation is different and only covered to £85k. Also they do not cover market or product performance. So this to me does not sound like 100% coverage, does it !?

This sounds like some misunderstanding as these are the rules covering investments.

HappyHarry

Annuities are covered 100% by FSCS

Linton

For all practical purposes annuities are 100% guaranteed by the FSCS. 

If an annuity company goes bust it will be taken over by an insolvency practioner whose job is to ensure that all creditors are paid as far as possible.  This is most likely to be done by selling the failed company's business to someone else which wuld not involve the FSCS.

Your FSCS contact said mismanagement compensation is limited to £85K.  I do not believe that means the insurance company going bust because of mismanagement but rather mismanagent causing you some sort of specific financial loss, perhaps money going astray because they sent the payments to the wrong account.  But even then there should not be any need for FSCS compensation  because it should be covered by the annuity company themselves if they were in a position to pay.  And if the annuity company ceases to exist and no other company is prepared to take over its liabilities you are in a 100% guarantee situation.

Your FSCS contact also mentioned no guarantee of market or product performance.  Any annuity you buy would be fixed or indexed linked, either way it is contractually guaranteed by the provider.  But there are other options;.  Annuities exist whose payout beyond a base value is not guaranteed but dependent on potentially risky investments.  Clearly if the performance fails to meet expectations that is not the responsibility of the FSCS.

Annuities should not be affected greatly by market performance because as well as the contractual guarantee  they are partly backed by gilts which are 100% guaranteed by the UK government. Unless of course the UK government ceases to exist,  but then all bets are off for pretty much anything.  Your annuity would not be your primary concern.

I believe you are over-thinking this.   Retirement has far more important risks.

dunstonh

FSCS says they cover 100% of consumer money if annuity company goes bust, is that true !?

That is the case for insurance contracts.

I think most people will be concerned with giving all their pension money to a company for ever and never have access or control over it again - and trust them to manage it properly for 20 or 30 or more years.

They are not managing it.  With an annuity you give up the pension in exchange for the guaranteed income for life.   The fund itself goes.  It is no more. Its a dead parrot.

So I read about this and in one hand I read FSCS covers the money 100% with no top rate limit, but in other reports I read the insolvency practitioner look at what money is left in the fund and decide compensation... !!!

The latter is completely wrong and doesn't apply to any insurance, deposit or investment class under FSCS.  Have you got a link to that?

So I had a long chat online with FSCS support and first she said the mismanagement compensation is different and only covered to £85k. Also they do not cover market or product performance. So this to me does not sound like 100% coverage, does it !?

Mismanagement and market performance does not apply to annuities (unless you have the rare beast of an investment linked annuity)

Oh, she also said since 2008 when FSCS was established, they did not have to bail out any annuity or pension company - though as they always say in finance, past  performance are no indication of future results !

Which is expected considering how low risk insurance FSCS protection is.

Be honest I guess if the market goes totally pear shaped, in case of serious catastrophe or economic disaster, any money invested in SIPP or ISA probably disappear and good luck running to the banks for any savings. But mismanagement is still a concern.

a) its not in a SIPP 
b) an economic catastrophe of the scale you appear to be talking about wont see you worrying about money any more
c) you appear to mixing up investments with insurance.

AustinZ

Thanks for replies, some good clarifications, it sounds like annuity investments are far less vulnerable to mismanagement or market ups and downs than I was thinking about anyway.

I also asked the FSCS support if there are some strict regulation governing annuity investment and strategies, which then makes it a lot safer in theory. But she said you need to contact FCA for that, and they have some and can give you details.

So assuming all this is in place, with FCA and FSCS, there is almost no risk associated with losing all pension in annuity even if the company goes bust. I guess only index-link option, as you guys mentioned, is one area that could face some risk...

And perhaps my own strategy in SIPP investments have far more risk than the annuity company... !
 

Albermarle

And perhaps my own strategy in SIPP investments have far more risk than the annuity company... !
 

Whatever you do there are risks, just some are more obvious than others.

For example with taking an annuity there is a risk that you miss out on good investment growth= higher pension/bigger legacy.

dunstonh

, it sounds like annuity investments are far less vulnerable to mismanagement or market ups and downs than I was thinking about anyway.

There are no investments.   It is an annuity.

So assuming all this is in place, with FCA and FSCS, there is almost no risk associated with losing all pension in annuity even if the company goes bust. I guess only index-link option, as you guys mentioned, is one area that could face some risk...

When you buy an annuity, you give up your pension.  it is no more.   There are no investments.

And perhaps my own strategy in SIPP investments have far more risk than the annuity company... !

Yes they will.