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Cash counter

Many investors choose Sipps for their cash flexibility but, as James Smith reports, the derisory returns on cash are causing industry rumblings

Self-invested personal pensions are largely bought and sold on their flexibility, with a much wider palate of assets available than on traditional personal plans. These include direct equities, commercial property and cash – with the latter proving popular in the turbulent market.

Figures published earlier this year show that one in 10 Sipps is currently up to 50 per cent liquid and around 30 per cent of the overall £50bn-plus market is thought to be in cash.

Given this bias and the wrapper’s supposed flexibility, lack of choice on the cash front is causing serious industry rumblings. Many Sipp administrators only allow investors to use a single deposit account and, as many have dropped interest in line with base rates, people are stuck with miniscule returns.

Recent research from Investec Private Bank reveals that 14 per cent of Sipp investors are getting Bank of England base rates or less on deposits and over a quarter get less than 1 per cent.

This comes as a third of pension advisers have seen an increase in Sipp business over the last year, with one in 10 clients specifically choosing the wrapper for cash flexibility.

A quarter of IFAs in Investec’s survey estimate that their clients have between £100,000 and £250,000 on dep-osit in Sipps.

Overall, the average return on cash balances of £1,000 is just 0.13 per cent gross AER and 0.19 per cent for £100,000 and only 10 of over 80 Sipps available are paying over 0.5 per cent on the latter amount.

Lionel Ross, pensions and trust specialist at Investec, says investors are turning to Sipps as a way of taking greater cont-rol of investments but currently face derisory returns on cash.

One option is to use fixed-rate bonds although this depends on your Sipp provider allowing external accounts and finding a bank or building society that accepts cash from a pension trustee. Among groups that do allow external accounts, several also charge additional fees for this facility.

Many clients want to split cash balances across providers and should be able to do so without excessive charges

Standard Life senior pension technical manager Andy Tully says the group has three cash options in its Sipp – a def-ault account paying 0.65 per cent, various fixed-rate bonds and open market flexibility.

External accounts are in the so-called outer ring for charges and incur annual costs of between £156 and £416 depending on the balance on sums under £500,000. However, Tully stresses that clients may already be paying this if they invest in property or use discretionary managers, for example, and the additional charge only applies once.

He says: “Provi-ders should offer flexibility on external accounts and allow investors to seek out rates to suit them. The same goes for protection. Clients are keen to split cash balances across providers and should be able to without excessive charges.”

This protection question is another concern for Sipps. While insured funds held in the wrapper are eligible for full protection under the Financial Services Compensation Sch-eme, cash deposits are only currently covered up to £50,000.

Financial Services Consumer Panel vice-chairman Kay Blair recently highlighted various concerns on Sipp protection in a letter to the FSA.
Insured and trustee Sipps are effectively treated as different products by the FSCS, with the former covered up to 100 per cent of the first £2,000 and 90 per cent of the remainder with no upper limit. Trustee Sipps are only protected up to a maximum of £48,000 (100 per cent of the first £30,000 and 90 per cent of the next £20,000).

From a consumer perspective, Blair said this anomaly must be addressed and called for all trustee-based Sipp assets to receive full protection.
Many in the industry are also hoping to see a single regime in due course, bringing Sipps into line with personal pensions. Tully says: “It is not helpful to have different compensation rules for insured funds, cash and mutual funds and a single regime is much simpler for all concerned.”

Blair has also highlighted cash held on deposit as many Sipp investors switch into cash or cash-backed assets before buying an annuity.

She says: “We believe it would be wholly unfair for consumers to be exposed to substantial losses at a point in their lives where, by definition, they are unlikely to be in a position to recoup the monies and where the capital sum is likely to represent a lifetime’s savings.” Many clients want to split cash balances across providers and should be able to do so without excessive charges

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