Managing cash in your Sipp

By Maike Currie, 25 November 2010

Most self-invested personal pension plan (Sipp) accounts have a default account into which cash holdings are deposited. A fully flexible Sipp will allow you to hunt around for a deposit account with attractive rates, but the options are much more restricted with low-cost Sipps. If this is the case with your Sipp, where should you be investing for low-risk, guaranteed returns? And if you are lucky enough to be able to move between deposit accounts with your Sipp, how do you make sure you are getting the best return possible?

The importance of cash

Holding cash in a Sipp deposit account can be an important strategy for those who have a low risk appetite, or who are nearing retirement and want to lower the risk to their retirement income by moving some of their investments into cash. So getting the best possible return on this cash is important. However, research from Investec Bank has found that investors typically receive an average return of 1.33 per cent on their cash deposits within a Sipp wrapper, with almost one in five (19 per cent) of investors receiving just 0.5 per cent or less. With inflation at 3.2 per cent, such low rates are eroding capital, not preserving it.

Lionel Ross of Investec Bank comments: "The prevalence of poor-paying deposit accounts raises great concerns as many investors are missing out on substantial returns, which in turn will impact the performance of their pension fund.

For example, IPS Partnership's Sipp plan uses an account with Barclays that pays a current interest rate of 0.1 per cent. At least this plan does allow you to use any external deposits, which could significantly up the return on cash held in your Sipp compared with the paltry rate offered by the default account.

But what do you do if your Sipp does not permit you to hold an external cash account? This is typically the case with lower-cost Sipps such as the AJ Bell's Sippdeal, which currently pays out between 0.05 per cent and 0.10 per cent depending on the cash balance held. Investors cannot move to other cash deposits, leaving them limited to using the Bank of Scotland default account and the funds provided on AJ Bell's dealing platform.

Hargreaves Lansdown's Vantage Sipp, another popular low-cost option, also does not offer the facility to nominate any bank account given the extra costs involved with offering such an option. Laith Khalaf, pensions analyst at Hargreaves Lansdown, says it is important to realise that more choice for the investor usually means more cost for the provider. "Some Sipps do offer the facility for the investor to choose their own cash account - however, these tend to charge higher annual fees," he says.

But some low-cost Sipp providers do also offer fixed-rate savings deals. Hargreaves has issued 28 fixed cash deals since October 2007- it does this from time to time when it can secure good rates with the bank. These have rangedfrom two months to one year in duration and from 1 per cent to 6.5 per cent in annual interest. James Hay uses an account with Santander, but allows external accounts with Cater Allen, offering 2.65 per cent return on 12 months or 1.15 per cent for a six-month deposit. Or you can opt for an account with Allied Irish Bank, which currently offers 2.93 per cent fixed for 12 months or 2.46 per cent for six months. However, the minimum investment for both bank's offerings is £50,000. James Hay says it is planning to add more options to this panel in the near future.

Mr Khalaf says investors need to consider whether the extra interest they think they can get is worth paying higher annual fees for. Consideration should also be given to other features of the Sipp to build up a rounded picture - for example, the costs of holding funds, the range of assets that can be held and the levels of service supplied by the Sipp provider.

"The longer the cash is held the more important the rate is; however, the vast majority of Sipp investors are not holding cash as a long-term investment strategy, rather they are simply parking the cash there in between investments, or while they wait for a market dip to buy in," adds Mr Khalaf.

For investors looking to de-risk their portfolio by moving Sipp investments into cash, but who are limited by the inflexibility of a low-cost Sipp, it could be worth investing in gilts or corporate bonds for fixed returns with lower risk. Another cash-type alternative is money market funds, although tread carefully with these investments. Money market funds have recently come under Financial Services Authority scrutiny regarding the type of assets they invest in. The low interest-rate environment has also created negative yields in some funds, meaning that once management charges are applied, capital is actually eroding in absolute as well as relative terms.

Finding the best deal

If your Sipp does permit external cash accounts to be used, you should look for the best possible returns on cash holdings. Don't just accept the low default rates. The rules are the same as with standard savings accounts - the longer you are prepared to tie up your money, the higher the rate you can expect.

One way a DIY Sipp investor can search for better cash rates is via Investment Sense, an online listing of high-paying savings accounts, which also features accounts available for Sipps.

The website's 'Accounts for Pensions' best-buy table is free to access and provides a service not typically offered by other comparison websites. The rates listed by Investment Sense, which is owned by the Sense financial adviser network, are for high minimum balances of £10,000 or more.

One of the best rates on an instant access account, according to Investment Sense's best buy tables, is Anglo Irish Bank's 2.8 per cent for minimum investment of £25,000. If you're prepared to tie up your money for five years, you can get a much higher rate of 4 per cent a year from Clydesdale Bank International for a minimum investment of £10,000. Of course over such a long time horizon there is always the risk that interest rates could increase from their current low levels, and your money will be left tied up.

Cash accounts for Sipps

Source: Investment Sense

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