When markets get rocky, or you’re considering buying an annuity, being able to shelter in cash within your Sipp can give you considerable peace of mind.
Current market conditions are certainly driving Sipp investors to take refuge in this safe haven. Research by James Hay has found there has been a shift to cash in the last few months, with cash making up more than 35 per cent of some Sipp portfolios.
But, while the security of a cash account within a Sipp can sound appealing, interest rates can be far from attractive. “Sipp cash account rates vary enormously,” says Matthew Ward, principal consultant for pensions and wealth management at financial information provider Defaqto. “Depending on your balance you’ll receive anything from 0 per cent to 6.23 per cent.”
According to Ward, and assuming a cash balance of £100,000, among the providers offering the best rates are Cooper Parry, Dentons Pensions Management, Hargreaves Lansdown, MW Pensions and Scottish Widows. Meanwhile at the bottom end of the table are Central Tax & Trustee Planning and E*Trade Securities.
It can be difficult to compare rates as Tom McPhail, pensions research manager at Hargreaves Lansdown, explains: “Rates are often tiered according to the size of the balance so you need to think about how much money you’re likely to leave on deposit when comparing rates.”
As an example Hargreaves Lansdown pays 1.00 per cent on the first £1,000, 2.50 per cent on the next £6,000, 4.50 per cent on the next £43,000 and then 5.00 per cent above £50,000. Others favour smaller cash balances. For instance Sippdeal’s e-sipp pays 2.25 per cent on balances of less than £1,000, but its highest rate, which kicks in on balances of more than £20,000, is only 4.00 per cent.
It’s not just the Sipp providers’ interest rates you need to consider. While every Sipp will include its own cash account, many of the providers will also offer you access to external deposit accounts. Francis Moore, managing director of European Pensions Management (EPM), explains: “We open a designated account for each Sipp with the Bank of Scotland, paying a rate of 1.5 per cent under bank base rate. But, if customers want to place cash on a term or call deposit account with an external provider, then this is possible, subject to the terms and conditions on the account.”
Getting these higher rates will generally entail some form of commitment. This could be in terms of a tie-in. For example, in exchange for a three month tie-in with the Bank of Scotland, EPM customers will earn an interest rate of 5.93 per cent. Extend the term to 12 months and the rate increases to 6.32 per cent.
To access these deals you might also need to commit to a minimum balance. For example, if you have at least £10,000 to stick in cash you can access James Hay’s special deposit account on its eSipp. This pays 6.90 per cent and has a 12 month tie-in.
Look out for charges on some of the external accounts too. For instance EPM has a set up fee of £100 plus VAT, followed by an annual charge of £100 plus VAT. “Although we charge these fees we don’t take any commission on external accounts so we can pass on the best possible interest rates to our customers,” explains Moore.
Not every Sipp provider will offer access to external accounts though. For example, AJ Bell only gives access to its own cash account on its Sippdeal product.
If you do go for external accounts then Malcolm Cuthbert, managing director of financial planning at Killik & Co, recommends spreading your cash around. “Be aware of the £35,000 limit on compensation that you’d receive from the Financial Services Compensation Scheme if a bank goes under. If you do want to leave more than this in deposit accounts, spread it across different institutions so it’s completely covered by the compensation scheme.”
This has become increasingly important in the credit crunch as the banks come under pressure. Moore says he has seen customers trade off headline rates to go with banks that are perceived to have stronger balance sheets.
But, while knowing you have the security of a cash account at your disposal can be a bonus, many experts question the importance of the interest rate in your choice of Sipp. “It shouldn’t be the over-riding reason behind your choice of Sipp,” says McPhail. “If you’ve gone for a Sipp then it’s more likely to be the investment flexibility that’s the main driver. Dealing charges will be much more important.”
Cuthbert agrees and says you may want to consider other low risk options instead of plumping for cash accounts. “I have clients with more than £1m in cash in their Sipps but there are other options,” he explains. “Gilts and investment grade corporate bonds can be low risk and will help to keep your portfolio diversified.”
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