Over the past few years all savers have been hit by a combination of low interest rates and rising inflation, making it impossible most people to get a real return, above inflation, on their savings.
However, because the number of banks and building societies offering such accounts is fewer, SIPP (Self-Invested Personal Pension) deposit account investors have been harder hit.
Even taking into account that no tax is paid on the interest from a deposit account held in a SIPP, even the best rates struggle to keep pace with inflation. The only account currently beating the Consumer Prices Index (CPI), which currently stands at 2.80%, is a five year fixed rate bond from the Punjab National Bank.
However, after Mark Carney’s ‘forward guidance’, which indicated interest rates might start to rise in three years’ time, many SIPP deposit account investors will be loathed to tie up their money for five years.
So, with interest rates so low, what options do SIPP deposit account investors have? Is now the time to move away from Cash?
Crucially is the risk of inflation eroding your capital now greater than losing money in other forms of investment?
Other options to holding Cash in your SIPP
Most people who hold deposit accounts in their SIPP, do so because of inherent safety of cash, assuming of course you use a bank or building society who are members of the Financial Services Compensation Scheme (FSCS) and you stick to the rules.
Let’s be clear, any other option will leave your pension fund exposed to a greater degree of risk, because you’ll lose the protection of the FSCS. However, you could still gain, if the alternative you choose beats inflation.
Here are a few options for you to consider:
Non FSCS Protected Bonds A number of fixed rate bonds have been issued recently which don’t have the protection of the FSCS. Perhaps the most high profile of these launches was from Agri Bank, who now pay fixed rates of 3.35% for three years, 3.50% for four years and 3.60% for five years.
The best FSCS protected SIPP deposit account rates over the same time periods are 2.65%, 2.75% and 3.00% respectively.
The rates from Agri Bank are clearly better, but by enough to persuade you to ditch the protection of the FSCS? Only you can decide.
A word of warning though. Do your homework, make sure your SIPP provider will accept such a bond, read the terms and conditions carefully and check out the institution offering the account, will you lose your capital in the quest for a bit more interest?
Structured Products This type of investment generally comes in two forms, plan protected by the FSCS, where your capital is guaranteed to be returned to you at maturity, and those where it is not and you could see a significant loss.
In very general terms the returns from a Structured Product are linked to equities, either via an index, such as the FTSE 100, or a ‘basket’ of shares. Some carry full capital protection, others will see your capital fall in value if the index or shares to which the plan is linked, falls below a certain level or indeed if the issuer of the plan, known as the counterparty, goes bust.
Structured Products are something of a ‘marmite’ investment, some people love them, others hate them, pointing to the way in which they have been miss-sold in the past.
However, for those people who are fed up of low interest rates, they can prove to be a useful addition to a diversified portfolio of investments. But if you do decide to invest, please take advice and read the small print; some of these products can be horrendously complex!
Investing Most Cash savers have been ‘burnt’ by stock markets at some point in their lives. Hence the desire to invest in a ‘safe’ asset classes such as Cash. However, at the moment, one of the things guaranteed about Cash, is that you’ll lose money in real terms.
If you are happy to accept the peaks and troughs of stock market investing and can afford to invest for at least five years, then now might be the time to consider investing rather than saving.
After all, if you save you will definitely lose money, whereas you would choose to invest in the hope of making a return above inflation. Sure, you will have to put up with the ups and downs of investing, but they might now actually be more palatable than the guaranteed loss from Cash.
Commercial property Buying a commercial property is one of the most popular reasons for using a SIPP. Whether you are in business and are fed up with paying rent, or you like the idea of diversifying into a different asset class, commercial property can provide a healthy return.
There are of course many disadvantages to investing in commercial property; the fees can be high, diversification can be hard to achieve and tenants can be troublesome.
But, if you are in business and previously invested in Cash, buying your own commercial property could be worth considering.
Don’t like the alternatives? You’ll have to stick it out!
If you don’t like the alternatives all might not be lost.
Although Mark Carney has suggested it will be three years, or so, before he will consider increasing Bank base rate from 0.5%, there is still the possibility rates could rise sooner:
- The markets seem to have largely ignored the ‘forward guidance’ and seem to believe rates will rise sooner than predicted
- The Funding for Lending Scheme, one of the main reasons for low savings rates, is due to come to an end in early 2015. If it isn’t renewed, it would be reasonable to expect savings rates to rise slowly once the scheme comes to an end
- Mr Carney has given himself a number of ‘knockouts’ in the event of which he would consider pushing rates up sooner. If the housing market overheats or inflation rises sharply we might see him having to put the gloves on and using one of his ‘knockouts’
Are you a SIPP Cash investor?
If you are fed up of low interest rates our team of advisers are here to help.
Why not get in touch today and contact one of our IFAs who specialise in self-invested pensions,?
The team can be reached on 0115 933 8433, alternatively enquire online or email info@investmentsense.co.uk
