Banks and building societies have again this week taken an axe to fixed rate cash deposit interest rates that can be accessed by SIPPs (Self Invested Personal Pension) investors.
SIPP deposit rates slashed
Scottish Widows Bank have slashed their three year Pension Deposit Account from 3% to just 2% for annual interest, or 1.98% if you take interest monthly, and now only have this one fixed rate available for pension savers.
Investec, who has continually offered attractive rates during 2012, has cut current interest rates by up to 1% on all their fixed rate products, with their long term, five year fixed rate, now only paying 2.50%.
United Trust Bank, who are members of the UK Financial Services Compensation Scheme (FSCS), as are Investec and Scottish Widows Bank, has completely withdrawn its one and two year fixed rate accounts and cut its three year fixed rate bond to 3% whilst reducing their five year bond rate to just 3.35%.
These three banks are not alone; nearly all other SIPP deposit takers have reduced their fixed rates recently, adding to pension holder’s distress.
Why are rates falling so fast?
Opinion is divided, but there seems to be a number of contributing factors, all linked to the supply and demand for money.
Banks have traditionally had two sources of finance, namely each other and their savers. Over the course of the last 12 months the LIBOR rate of interest (the rate banks pay to borrow from each other) has dropped by nearly 1%, making other banks a more attractive source of funding than savers. In addition, for those banks who have signed up, the government’s Funding for Lending Scheme (FLS) has been an additional source of cheap finance.
As we approach the end of the year it also seems that some lenders have hit their targets and are therefore reducing interest rates before the start of 2013.
Finally, despite calls from the national media for banks to lend money to UK businesses it seems that many banks are finding it hard to lend. Whether the lack of lending is due to a fall in demand or excessive caution on the part of banks one thing is clear, if they are not lending, they don’t need to attract money in, which means they can pay lower rates to savers.
Poor interest rates on mandated SIPP accounts
On top of this, most SIPP providers are offering derisory rates of interest on the mandated SIPP bank accounts. Our research shows that the average rate of interest on these accounts averages just 0.25%.
Jessica McGowan, Independent Financial Adviser with Investment Sense, said: “The cuts from United Trust Bank, Scottish Widows Bank and Investec are just three of many that hit hard those people who have done the right thing and painstakingly built up their own pension fund by self-investing”
Jessica continued: “It typically hits those about to retire and are sheltering their cash from volatile markets, or risk averse investors who have already retired and are just trying to preserve their pension pot, whilst drawing down income to live on.”
Commenting on the reasons for the rate reductions, Jessica said: “All these forces are a pincer movement reducing interest rate income to a trickle, and pensioners who have rejected poor value Annuity rates are increasingly forced to take risks with their pension pots that are not advisable at their life stage.”
Concluding, Jessica said: “There are still a few fixed rate pension deposit oases left that are still protected by the FSCS, such as the UK branches of The State Bank of India, Baroda Bank UK, and Punjab Bank UK, all of whom currently offer over 4% interest if you are willing to tie up your money for five years, but you must be careful to ensure that your deposit, including the interest accrued, does not exceed £85,000 with each at any one time.”
Our team of Independent Financial Advisers in Nottingham are experienced in advising SIPP investors on their cash options, if you would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email firstname.lastname@example.org