If you’re holding cash on deposit in your SIPP or SSAS, here’s some things you can do to earn the highest interest rates on your money
Cash Can Be An Important Asset Within A SIPP Or SSAS, Providing It’s Working Hard For You
A Little Bit Of History On Holding Cash In A SIPP
In 2013, we highlighted the fact that some SIPP operators were helping themselves to your deposit interest, in an article entitled Is Your SIPP Operator Earning 9 Times More Than You On Your Cash?
The situation hadn’t improved much by mid-2016, as you can see in this article entitled Is Your SIPP Operator Pocketing Your Interest?
Thankfully, the situation appears to be changing, albeit very slowly!
Active Cash Management In A SIPP
With volatility an ever-present feature of the current economic climate, it’s no surprise that increasingly, people are looking for a safe haven for their money. That includes Warren Buffett who's sitting on a cash pile worth $109 billion.
Right now, one of the largest SIPP operators in the UK is trialling an active cash management service.
On the face of it, an active cash management service is a good thing.
The tricky part is making it cost effective.
The SIPP operator running the trial is proposing to outsource the cash management service to a stockbroker, who’ll charge an average of 0.25 per cent for the privilege of finding you the best rate.
Whilst this doesn’t sound very much, in a low interest rate environment, it’s a pretty expensive solution.
Consider this example.
At the moment, you could earn up to one per cent on your money for a short term investment. It means the stockbroker is effectively taking a quarter of your interest!
By any standards, a management fee of 25 per cent is excessive.
Of course, if you could earn five per cent on your money, the cost of the management fee plummets accordingly.
Sadly, interest rates of five per cent are a thing of the past. And they’re not expected to return for some considerable time, if at all.
Here’s a summary of the current rates that could be earned under the cash management service and the comparative ‘direct rate’ if you approach the bank directly.
How To Get A Better Rate With Even More Protection
Currently, there are some investments available from National Savings & Investments paying interest rates higher than those quoted at the above link.
More than 25 million people in the UK have savings invested with National Savings & Investments, making it one of the best known and largest savings providers in the UK.
One of the main reasons for its popularity is that National Savings & Investments are backed by the Government. It provides you with peace of mind that 100 per cent of your money is protected, no matter how much you invest.
Savings held with other providers are protected up to a maximum of £85,000 per person and per banking institution (as of January 2017), thanks to the Financial Services Compensation Scheme.
To fully protect your money, this limit can have the effect of causing you to compromise on rate by spreading your savings over a number of banking institutions.
With National Savings & Investments, there is no upper limit, other than the limit on the products themselves, which can be as high as £1 million.
Better protection and a better rate. What’s not to like?
SIPP And SSAS Approved National Savings & Investments
Fixed Interest Savings Certificates
Index-linked Savings Certificates
Guaranteed Growth Bonds
Guaranteed Income Bonds
Guaranteed Equity Bonds
How To Find The Best Interest Rates
If you’re time poor with a considerable amount of cash to invest, a cash management service could be of value, earning you a little extra for little or no work.
But for most of us, it clearly pays to go direct.
Unfortunately, it's often the case that some of the ‘stockmarket only’ SIPP operators will not allow you to go directly to the best interest rate paying providers, whether they’re banks or National Savings & Investments. Instead, they insist you use their choice of deposit takers, which rarely offer the best rates.
These flexible self-invested pensions should allow you access to the whole market of deposit takers, including National Savings and Investments.
Depending on how much you want to invest, you might be better off switching some or all of your money to another pension provider, so you can take advantage of higher interest rates, or more protection for your money.
The Risk Of Holding Cash
Thanks to the Government and the Financial Services Compensation Scheme, you’d have thought that investing in deposit-based investments like those described above is risk-free.
Well, mostly that’s true. But not completely.
You won’t have removed the inflation risk.
Interest rates paid on deposits in recent years have consistently been below the rate of inflation in the same period. This has effectively eroded the real buying power of your money, making it worth less in real terms now than it was in years gone by.
And when you take into account the fact you’re probably paying fees to your SIPP or SSAS operator on top, you could be going even further backwards.
That’s not to say cash investment is wrong.
It’s merely an observation that risk is present in one form or another in almost everything to do with money!
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AJ Bell Is Often The Best Value SIPP For Stockmarket Assets
Over time, charges can wipe out a huge part of your fund. We like AJ Bell because there are no set-up costs. If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund. And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment). However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.
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As SIPPclub neither advises on, nor arranges, nor recommends specific investments or strategies, we're unable to say whether a SIPP or SSAS or any investment within it is right for you. Ultimately, it’s your money and your decision, and you should only proceed once you're satisfied you've undertaken sufficient due diligence. If you need advice, you should speak to your trusted adviser, or you could find a local adviser from Unbiased.co.uk. Alternatively, we'd be pleased to introduce to a suitably qualified independent financial adviser.
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