High inflation and historically low bank base rates mean investors are being punished for trusting in cash. But with volatile markets making some investors nervous and a certain level of liquidity required as a matter of necessity, Sipp investors will always have to face the conundrum of where to put their cash.
While deposit rates on the high street have started to inch up over the last year, the trend for the rates offered on Sipp providers’ deposit accounts is moving in the opposite direction. The average gross deposit rate for funds up to £25,000 was an already not fantastic 0.19 per cent in January but inched down to 0.18 per cent by October. For £1m-plus funds, rates have come down from 0.28 to 0.27 per cent on average.
Defaqto wealth management consultant Matt Ward says: “Cash default accounts within Sipps are typically there to hold money between investment transactions or for a short period of time. Reflecting the low base rate, interest rates on default Sipp cash accounts are currently low, even for large balances. Importantly, if clients do want to use cash accounts as part of their Sipp investment approach, they should shop around for the best rates. It is important for Sipp investors to understand the terms of associated bank accounts and the interest they can expect to accrue.”
Cash investments typically fall into two categories. Instant access for everyday expenses and withdrawals or longerterm holdings, usually fixed term, with a view to returning some albeit meagre returns.
When it comes to instant access, the best onshore accounts offer 2 per cent. Both Scottish Widows Bank and Santander pay such a rate, according to figures from Investmentsense.co.uk, an organisation that compiles Sipp deposit account data. It is an increasingly competitive sector Leeds Building Society recently entered the market with a 1.8 per cent instant access offering.
But if you are prepared to go offshore, Anglo Irish Bank will give 2.45 per cent, with a minimum balance of £25,000. That deal is covered by the Isle of Man compensation scheme, which only guarantees £50,000 per saver.
Investmentsense.co.uk marketing manager Phillip Bray says: “Rightly or wrongly, we are definitely seeing people avoiding Irish banks. People understand the FSCS but they are less certain about compensation schemes overseas.”
For one-year fixed terms, the best deal is from Julian Hodge Bank, which is paying 3.3 per cent on its capital millennium bond on deposits of between £1,000 and £1m. Covered by the FSCS, it offers the same return as the best offshore rate on the market from Anglo Irish Bank based in the Isle of Man.
For those prepared to tie up their money for five years, Scottish Widows will pay 4.25 per cent on deposits between £10,000 and £1m, with the benefit of the FSCS up to the £85,000 limit.
Bray says: “We do see some people taking five-year deals but you have to ask yourself, is now the time to be fixing your return for five years?”
The onshore five-year rate from Widows is higher than any of the other offshore accounts surveyed by Investmentsense.co.uk.
Informed Choice managing director Martin Bamford says: “When looking at the fixed deposit rates, we are increasingly looking for providers that are covered by the Financial Services Compensation Scheme. Offshore providers can offer more but we are cautious about recommending them, particularly in light of what is going on in the European Union at the moment.”
Such an attitude is hardly surprising, given the events of 2008 when, at the height of the credit crunch, Kaupthing Isle of Man’s Icelandic parent collapsed. While the Isle of Man’s compensation scheme covered personal investors, fears grew that protection would extend to trustee and client accounts covered through Sipps.
Suffolk Life head of marketing Greg Kingston says: “As it turned out, the issue over whether a single master-trust Sipp provider could only claim one lot of compensation never really got tested. We managed to get compensation from the Isle of Man compensation scheme on an individual basis for all of our customers when Kaupthing went down.”
But that was only after investors, Sipp providers and IFAs had spent a nervous few months staring at the small print. The credit crunch also impacted that other former staple of the cautious investor the cash fund. These funds are supposed to give stable returns at or around the returns on cash. However, they are yet to fully recover their reputation after the Standard Life Investments debacle, when it emerged in 2009 that its cash fund had invested in toxic mortgage debt.
Threadneedle’s money market fund did even worse at the peak of the financial crisis, falling by 16 per cent in the year to January 2009.
Advisers remain critical. “Cash funds are a complete non-starter. I would avoid them like the plague,” says Worldwide Financial Planning IFA Nick McBreen. “No one should be playing around with cash.”
IFAs differ in their views as to how much should be held in cash. Bamford recommends his Sipp investors hold between 5 and 15 per cent of their assets in cash, agreeing this is possibly higher than many other IFAs. Some at or close to retirement will hold considerably more while other IFAs recommend less.
McBreen is almost completely anti-cash. “Cash should only be used in a Sipp for income drawdown or for payment of fund charges. It should be used for nothing more, unless you are taking a freak-out view of the market. Even then you can end up seriously embarrassed if you try to call the market.”
He does not want to touch even the two-year fixed-rate deals on the market, seeing it as separate from what an adviser should be doing. “It is simply not part of the conversation I have. The aim is to build diversified portfolios and cash does not form any part of that.”
But it seems some clients may have done well out of a temporary shift into cash. Kingston reports a trend away from cash into equities from September, which should mean well-informed investors have benefited from the recent stockmarket rebound.
AJ Bell has experienced a similar move away from cash. Marketing director Billy Mackay says: “Volatility has driven people to be more cautious but since September we have been seeing more people using downward market movement as an opportunity.”
Where clients can time the market, they are less likely to be worried about cash rates. But for those who cannot, shopping around will remain key.