Despite interest rates remaining stubbornly low, the best buy table for SIPP deposit accounts is still the most popular page on our website.
SIPPs, or Self-Invested Personal Pensions to give them their full title, are becoming increasingly popular, with the range of investments allowed, as well as the introduction of Pensions Freedom, behind their increased popularity.
So with interest rates so low, why would you want to hold a deposit account in your SIPP? Here are five possible reasons.
#1: You want to reduce the amount of risk you are taking
Deposit accounts are generally held by people who want to take no investment risk with their capital. To put it another way, they don’t want the value of their pension savings fall, as can happen with certain investments, such as stocks and shares.
Holding your capital in a deposit account will eliminate the possibility of losing money, providing of course you ensure keep within the limits of the Financial Services Compensation Scheme (FSCS).
One word of warning though. Whilst holding money in Cash will mean the value can never fall, but the buying power might, if inflation is higher than the interest rate you are receiving. Although this isn’t the case at the moment, there is no guarantee that inflation won’t rise in the future and erode the real value of your pension savings.
#2: The return from Cash is sufficient for your needs
Some people, especially those with relatively large pension funds and modest income requirements, may not need to take large amounts from their pension fund.
In these circumstances you may prefer to simply invest in Cash, as the interest you receive is sufficient to provide the income you require and the charges you are paying.
#3: As a short-term home before you buy property
Many people, especially business owners, use their SIPP to invest in commercial property.
If you are planning to buy a property, which is almost always a large expense, holding the capital you intend to use in Cash, which of course can’t go down in value, could well be a sensible move. The last thing you need just before you are due to complete your purchase, is a fall in the stock market, leaving you with insufficient funds for your needs.
Of course if you are in this situation you must ensure that any deposit accounts you use are easily accessible and fully covered by the FSCS to ensure your capital is fully protected.
#4: Leading up to retirement
As you approach retirement you may want to reduce the risk you are taking with your pension fund.
For example, if you plan to buy an Annuity (yes, some people still take this option!) then it can make sense to reduce the risk you are taking and move money into deposit accounts within your SIPP, as retirement gets closer. This will mean you are protected from potential falls in the stock market; of course you could lose out if the market rises.
Even if you plan to use Flexi-Access Drawdown to take an income from your pension, moving a quarter of the pension pot, which will be paid out as your tax-free cash, is also something you should consider.
#5: The interest rate is better than you get from the mandated SIPP bank account
All SIPPs have a mandated bank account, which is used to process transactions, receive payments in and make payments out.
This account is almost always chosen by the SIPP provider and generally, although there are a few notable exceptions, pays a very poor interest rate. This is of course partly because interest rates are low at the moment, but also because many SIPP providers keep some of the interest for themselves.
As our best buy table for SIPP deposits shows, there are a wide range of accounts available and if you plan to hold Cash in your SIPP for anything other than a very short period, you should consider an alternative to the mandated SIPP bank account.
One word of caution though, if you do decide to do this, make sure you check out any additional fees you will have to pay; there’s no point searching for a better interest rate only to have the higher return swallowed up in additional costs.
We’re here to help
If you have a SIPP and need advice, we’re here to help you.
Our advisers are highly experienced and knowledgeable when it comes to self-invested pensions and would be happy to help you. The initial discussion, whether on the phone or face to face, is always without cost or obligation.
Call Bev or Sarah today on 0115 933 8433 or email info@investmentsense.co.uk
