The importance of holding cash in your Self Invested Personal Pension (SIPP)

Author: Roger Clarke, The Private Office

We are, of course, seeing interest rates that have not been this high since before the financial crisis of 2008, so it is no surprise that there is more interest in the use of cash as a whole – but also in Self Invested Personal Pensions (SIPPs).

A SIPP offers you a far greater selection of investment solutions. It also allows greater flexibility in how you access benefits at retirement and how you can pass on any remaining funds to your loved ones when you die.  However, as these products come with additional charges and complexity, they may not be suitable for everyone.

They have become more popular since the introduction of the pensions freedoms in April 2015 as many older pensions have not adopted the new rules.

Cash always has, and always will be, a cornerstone for SIPP investments, particularly for those who are in retirement and drawing down an income. From a planning point of view, cash in a SIPP represents the lowest risk element and, therefore, is utilised for meeting ongoing income requirements. Our view is that there should be a reasonable buffer of cash to meet income requirements, maybe up to three years’ worth, depending upon client objectives.

This requires some of the cash to be available without notice (and this is typically held within the trustee bank account) but any longer-term cash (say one year or longer) can be earmarked for higher returns. This process has much more meaning in today’s world as one year cash savings fixed rate bonds are significantly higher than they were just two years ago.

In this respect, utilising cash within SIPPs (conceptually) has not changed, but the rates have! And, whilst the money is being held in a pension, the returns are tax free!

The next question is whether cash should be considered as an alternative to conventional investments for longer term investing. It is tempting to simply compare investment returns over the last two years with cash returns and come to the conclusion that cash is the right place to be. The problem is that this would involve coming out of the market with the belief that, say, a three-year cash bond would outperform an investment portfolio. Although, with hindsight, this could have been potentially a suitable tactic over the last year, it may not be the case over the next year, and we certainly don’t know if this will be the case over the next three or five years.

Other asset classes (such as equities, fixed interest and property) have had a fairly difficult time of late, but history tells us that this is cyclical and that at some point these asset classes are likely to perform again, although past performance is not a reliable indicator of future return. If they do not, then I am afraid that is going to be the end of capitalism (at least as we know it).

As for when any recovery will occur, nobody knows. What we do know is that there is significant risk by not being invested. A study of the S&P 500 between 2001 and 2021 revealed that the annual growth rate of over 9.52% was reduced to just 5.33% if you missed out on the best 10 days of returns over the 20-year period. There was no way of knowing, in advance, when the best 10 days were going to occur. What is evident is that many of the best days occur after crashes or periods of market downturns.

As such, cash, in our view, is still a short-term strategy but, of course, we can now secure much better rates on two or three-year rates.

One thing that has to be appreciated when seeking cash accounts with SIPPs, is that it is not the same as simply going out to the market with personal cash. Technically, all SIPP assets, including the cash, are under trust for the SIPP owner, but the legal ownership falls with the SIPP Trustees. As with all SIPP assets, any cash deposit purchased must be purchased directly by the Trustees and some have a more restricted list of providers than others.

Most will operate a “panel” of preferred banks or building societies. Many of us remember the dark days of 2008 when many banks faced extinction and the whole experienced sharpened regulation and, with it, the protection offered by the Financial Services Compensation Scheme (FSCS) which provides protection of up to £85,000 per investor per banking licence. When it comes to SIPPs, although the SIPP Trustee is the legal owner, the FSCS regards the beneficiary, or the SIPP owner, as being the holder and, therefore, SIPP investors are able to claim from the FSCS should the bank or building society holding their money go bust. The experience of the financial crisis has led SIPP Trustees to be more circumspect when it comes to permitting bank and building societies on to their “panels”!

Another point to take into consideration is that the rates are, generally, not quite as high as they would be on the open retail market. But some rates are still very attractive, so it pays to shop around.

Although the role of cash in a SIPP is primarily to protect against being forced to sell investments at the wrong time to provide your retirement income, it still makes sense to make that cash work as hard as possible, to add as much extra value as you can. But when it comes to long term investment, history tells us that real returns are obtained from diversified investment portfolios, not cash.

Although not as widespread as SIPPs, some clients have Small Self-Administered Schemes (SSASs) which are a type of work pension, usually a defined contribution workplace pension, that also give extra investment flexibility – and the same principles apply.

Roger Clarke – Partner

Charter Independent Financial Adviser – The Private Office

This article has been written by a third party whose views may differ from United Trust Bank and although it may contain helpful information and tips, these are not personal advice. You may wish to seek advice from a financial advisor if you are unsure what’s best for your own personal circumstances. The Financial Conduct Authority (FCA) does not regulate cash advice. The opinions shared in this article are solely those of the individual and they do not necessarily reflect those of The Private Office.

To find out more about placing SIPP or SSAS cash in one of United Trust Bank’s competitive deposit accounts please speak to your advisor, pension provider or administrator.

If you are a pension provider or administrator who would like to deposit the cash element of a SIPP or SSAS on behalf of your clients with United Trust Bank, you can view our range of products, associated product guides and apply here

All parties to the account must be UK residents over the age of 18.