Is cash the forgotten asset of the world of Self-Invested Personal Pensions?
The Self-Invested Personal Pension (Sipp) market has grown rapidly since the concept was first introduced to the UK around 15 years ago. The result is that there are now approximately half a million Sipp plans and that number is expected to double over the next five years, according to some in the pension industry.
When talking about Sipp accounts, the main focus is naturally placed on the diverse and sometimes eclectic forms of investment that can be included. However, an oft-neglected element is the cash deposit account. This typically contains money resulting from the transfer of funds into the Sipp from other schemes, lump sums being invested, or the fund needing cash to meet income drawdown payments. In some cases, the Sipp may also have been liquidated ahead of purchasing an annuity.
However, market volatility has led to a shift towards cash in the past year as investors seek consistent, lower-risk returns. The result is a shift towards increased levels of cash - a trend supported by research we recently conducted, which found that in the past 12 months over half (55%) of pension administrators surveyed had witnessed an increase in the proportion of cash allocated to clients' Sipps.
Nearly a quarter of administrators (23%) said that they had typically witnessed an increase of up to 25% among their clients. However, a further 13% of pension administrators reported an increase in the amount allocated to the cash element of their clients' Sipps of between 26% and 50%.
Key research
In terms of the amount invested, our research revealed that while 39% of pension administrators believe their clients tend to have less than £100,000 in the cash portion of their Sipp, 13% of clients have between £100,000 and £250,000, and around 3% have between £500,001 and £1m in cash.
Despite the size of the deposits, Defaqto analysis shows many investors with Sipps are receiving derisory returns on the cash they hold in these wrappers. The examination of 84 Sipps reveals the average return on cash balances of £1,000 is now just 0.13% gross AER as a result of accounts tracking the downward path of the Bank of England base rate over the past year.
The situation is a little better for larger balances with the average return on cash balances of £100,000 held in Sipps lying at just 0.19% gross AER, while only 10 accounts pay interest of 0.5% or more.
Our research shows over a quarter (29%) of pension administrators questioned stated their clients receive on average less than 1% on the cash element of their Sipps. Only 13% said their clients' money earns over 2% interest.
Disappointingly, given the increased importance of the cash element of Sipps, our research has also unearthed the fact that just over half (51%) of pension professionals do not currently know the rate of interest received on the Sipp accounts they administer. This compares to 32% of advisers surveyed approximately 18 months previously.
Adviser ignorance
The significant rise in the number of advisers that do not know the rate is both surprising and concerning but it may well be a result of the volatility of interest rates over the past 18 months, which will have made it harder to keep track of exact rates. It can also be explained in part by the fact that while there are numerous 'best-buy' tables and websites promoting cash rates on standard savings accounts, there is little or no information available on the returns paid on cash by different Sipp bank accounts.
It can also be made difficult by the fact that some administrators and pension trustees are tied to their Sipp provider and have to accept their stipulated returns on cash.
The rates of interest available on cash held in Sipp accounts tend to be fairly pitiful as they are not the key focus for many investors. Given this, it is clear that greater transparency is needed in this area to enable investors and their advisers to make more informed decisions when selecting a Sipp in order to maximise returns.
Cash elements
Although many advisers were unsure of the rate of interest being paid on the Sipp accounts they administer, just over half (55%) of the pension professionals surveyed said they believe that they could get a better rate of interest on the cash element of the Sipp accounts they look after, while only 10% were certain that they could not get a better deal for their clients' cash by moving it elsewhere.
Advisers appear to remain reluctant to move cash around to other accounts. The main reason cited being the administration involved is too onerous (30% of advisers). This is followed by the belief their existing provider offers a good service and low administration charges (19% respectively) as well as a preference for working with one provider (11%).
However, as the Sipp market becomes more competitive, providers should be looking to offer more attractive returns on cash as a way of differentiating their proposition and growing their client base. A poor proposition for cash could lead to investors feeling that other areas of a provider's proposition are weak and should be avoided.
As it grows, the Sipp market will come under greater scrutiny and the current returns on offer for cash are difficult to defend. This is likely to lead to growing criticism and the industry should act to avoid this and look to offer consistently fair rates if it is to keep clients satisfied.
