Is Your SIPP Operator Earning 9 Times More Than You On Your Cash?

Is Your SIPP Operator Earning 9 Times More Than You On Your Cash?
Red Sea Egypt by Julian Cohen. Why?

The reason you're not earning much interest on your cash deposits in your SIPP could be that your SIPP operator is keeping most of it!

If you’re holding more than a few thousand pounds on deposit in your SIPP, you could be subject to a modern day highway robbery

I’m Pretty Sure You’re Not Going To Like This

Too often, I see people holding far too much cash in their SIPPs, for far too long.  To me, it’s a very costly exercise that you could live to regret.  But your SIPP is ‘self-invested’ and ultimately, it’s your money and your choice. 

Whilst I’ll freely admit to having a bee in my bonnet about this, if you’re committed to holding cash, at least let me help you make sense of what is really going on. 

As with everything financial, I always begin my research where few fear to tread.  The smallprint.  For that’s usually where bad news is buried.  You know, the boring bit that hardly anyone reads, except perhaps the sad ones like me.

It’s not really surprising though.  According to Which? there are more words in PayPay’s Agreement than in Hamlet.  And the Terms on Apple’s iTunes page is longer than Macbeth.  But I digress!

I’m not about to name and shame the culprits, for there are many.  Here’s a selection of what I’ve found from three respected SIPP operators.

SIPP Operator A

Balance: £0-£50k

Interest Rate: 0.1%

Balance: £50k-£500k

Interest Rate: 0.12%

Balance: £500k+

Interest Rate: 0.15%

SIPP Operator Comment
In the smallprint, towards the end of the document, it says “The average rate of interest paid to ‘SIPP Operator A’ during the year ending 31 December 2012 was 1.45%.”

SIPPclub Observation
If you had £500,000 invested, and I can tell you that some SIPPclub members have even more than this held in cash, you’d have received £750 for the year.  Your SIPP operator will have pocketed a rather handsome sum of £7,250.  Incredibly, on average, it's making more than nine times what you are!

SIPP Operator B

Balance: Any amount

Interest Rate: 0.1%

SIPP Operator Comment
In the smallprint, it says: “The nominated SIPP bank may pay ‘SIPP Operator B’ a maximum of 0.50% per annum of any cash deposits held in your account.”

SIPPclub Observation
So if you earn 0.1% and it earns 0.5% on your money, it's making five times more than you are.  It’s your money, though you wouldn’t think so!

SIPP Operator C

Balance: £0-£1k

Interest Rate: 0.0% (!!!!)

Balance: £1k-£7k

Interest Rate: 0.05%

Balance: £7k-£50k

Interest Rate: 0.05%

Balance: £50k+

Interest Rate: 0.1%

SIPP Operator Comment
The smallprint, which was very, very small, says: “Should you require further details in respect of our remuneration, commissions, payments and fee details these are available on request.”

SIPPclub Observation
After several phonecalls, I was told “The interest retained depends on the size of your cash balance and whether you choose the variable or fixed rate, and, based on the 12 months to 30 June 2013, ranged between 0.34% and 2.13%.” It was unwilling to reveal how much of its interest was earned at the higher rate. Most of it, I suspect!

By way of balance, it’s not all bad news.  My research did turn up some SIPP operators that do allow its clients to keep all of the interest earned. One is proudly boasting a current rate of 1%.  And that's between 6 and 20 times more money than all of the above accounts!

Incredibly These SIPP Operators Are Doing Nothing Wrong

Whilst they might have questionable ethics, what they’re doing is all above board.  That’s because they’re telling you about it in the smallprint. What they also know is that you're most unlikely to read it. Let alone do anything about it.

Personally, I think it’s a pretty mean trick for them to earn more money on your cash than you are. Goodness knows how you feel about it.

There’s another point to consider.  Under the Financial Services Compensation Scheme, only the first £85,000 is guaranteed.  So if you hold more than this sum within your SIPP, you have a very valid reason for asking your SIPP operator to spread your money across more than one account.

What You Should Do About It

Simple.  Talk to your SIPP operator.  After all, as a trustee, it has a prime and over-riding duty of care for you, a member of its SIPP.  Here’s what I found when I asked the three operators above about my options.

SIPP Operator A

It's happy for me to move my cash to any approved deposit account.  It would, however, require me to retain around £1,000 in the account it runs for me, sufficient to cover any upcoming cash calls, like SIPP fees (yes, they take those too) or loan repayments.  But it had no objection to me opening an alternative account that pays a much higher rate, on which I can keep all the interest. 

SIPP Operator B

It's also willing to allow me to switch accounts, but it said it would normally retain 0.5% of the interest I received, in line with its term and conditions. 

SIPP Operator C

Despite being one of the biggest, it isn’t willing to play ball at all.  If I didn’t like its terms, I would need to close my SIPP and go to another SIPP operator.  I wonder just how seriously it's taking its role as trustee.  Thankfully, my SIPP isn’t with this SIPP operator. 

As you’d probably expect, I never leave more than a thousand or two in cash.  That’s because even the highest earning SIPP deposit accounts typically struggle to give you a real return on your money, when you take into account the effect of inflation and other SIPP charges. Here's a summary of the areas to invest to beat inflation.

Do Something About This Now

Having spoken with your SIPP operator, if they won't let you keep all the interest earned on your money, send us a message using our contact form, and we’ll be delighted to point you in the right direction to those that will.

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