A reader currently holds large sums of cash in a self-invested personal pension (Sipp) and individual savings account (Isa), but feels disgruntled about the low interest rates available from their platform provider, Hargreaves Lansdown. They wonder what else to do without exiting the tax-efficient wrappers.
The reader says: “I like and follow Chris Dillow’s advice in many investment decisions, one of which is to maintain a lot of cash during these uncertain times. The problem is that most of this cash is in my Sipp or in my Isa and attracting a paltry rate of interest with my platform provider.
“For obvious reasons I am loathe to withdraw to chase a better rate of interest. I think my provider should do more to compensate me for their gain on the cash held. I know I can transfer the cash in my stocks-and-shares Isa into a cash Isa, but I would still be left with a large amount of cash in my Sipp. Do you have any suggestions?”
Kay Ingram, chartered financial planner at advice firm LEBC Group, answers:
Holding large amounts of cash during uncertain economic times is intended to be a temporary position to enable the investor to take advantage of a lack of confidence in markets and give them the opportunity to benefit from asset mispricing. To do so, the investor needs to be able to quickly execute a stock or fund purchase. This means that funds should remain within the stocks-and-shares Isa or Sipp to enable swift execution, even if the interest rate earned is less than could be available elsewhere.
Cash Isas and stocks-and-shares Isas can have funds transferred between the two types and will still enjoy the same tax privilege of tax-free income and growth, but a transfer to a cash Isa and then back again to a stocks-and-shares Isa can take several weeks. This would defeat the purpose of timing investment at a point where the investor perceives value.
Withdrawing funds from a pension wrapper would give rise to a potential income tax charge on 75 per cent of the withdrawn amount and could also limit the individual’s ability to save with the benefit of pensions savings tax relief in the future. If more than the tax-free cash amount is withdrawn, the money-purchase annual allowance shrinks from £40,000 a year to £4,000.
With the Bank of England base rate at 0.1 per cent, achieving an above-inflation interest return is difficult. One strategy is to invest in money market funds, which include a selection of short-term bonds as well as deposit facilities, and this may give a slightly better return than a scheme bank account, while allowing switching of funds daily.
It is also important to choose a Sipp or Isa provider that excludes funds held in bank accounts from any percentage charge for administration services or the investor is likely to pay more than they receive in interest while the base rate remains low.
Other options
Hargreaves Lansdown’s Active Savings service, which allows you to pick instant-access and fixed-rate savings products from different banks and building societies, is not currently available in an Isa or Sipp. However, a spokesman for the company said it hopes to offer it via a cash Isa by the end of 2020, and in a Sipp after that.
More generally, the reader’s approach to cash could depend on its ultimate purpose. Hargreaves suggests that cash used as an emergency fund, in preparation for a withdrawal or to balance a portfolio, should probably not be invested. But an investor holding cash tactically may want to either drip-feed it into markets or put it to work at times of volatility. Those doing the latter should note that timing a market low is incredibly difficult.
Defensive fund options may hold more appeal than cash. Funds with a focus on high-quality, short-duration bonds such as the iShares £ Ultrashort Bond UCITS ETF (ERNS) might appeal as a source of interest.
Defensive multi-asset funds may also stand out. Ruffer Total Return (GB0009684100) held up well in the sell-off that began in February 2020, in part by using equity market put options. The fund more recently had significant exposure to inflation-linked bonds, as well as allocations to gold, cash and options. Funds such as Troy Trojan (GB00B05KY352) have been running a similar asset allocation.
Other flexible funds might also offer some protection. Allianz Strategic Bond (GB0031383408), which seeks to act as a diversifier to equity allocations, can invest across the bond universe, but also uses tools such as derivatives and currency exposures to protect investors against a possible sell-off.
However, even the most defensive fund comes with greater risks than simply holding cash. Bond funds could suffer if inflation rises, for example. The Ruffer and Troy funds, while positioned for such an event, are exposed to any shift in sentiment on gold. Troy Trojan has also held some highly valued US tech stocks such as Alphabet and Microsoft. DB
