Despite interest rates remaining stubbornly low, many SIPP investors still like to hold significant amounts of cash on deposit.
We are regularly asked why rates on SIPP deposit accounts are lower than for personal savers. We thought we’d look into this in more detail and ask “are SIPP cash investors second class savers, or is this a myth?”
Mandated SIPP bank accounts
The first problem SIPP investors have to solve is how to get the best possible interest rate from any short term cash they hold.
All SIPPs have a current account. The provider of this account is nearly always mandated by the SIPP provider and often pays little or no interest at all. This is of course partly due to the prevailing climate of low interest rates, but also because many SIPP providers keep part of the interest, which would have otherwise been paid to the account, for themselves.
We’ve said before we are against this practice and would like to see much more transparency, as we don’t believe that most SIPP investors know their SIPP provider is using their cash as a ‘secret’ income source.
For SIPPs which will allow other deposit accounts to be opened there is of course a relatively straightforward solution; go open a different instant access account! But watch the additional fees which might be charged and of course this isn’t an option for SIPPs which won’t allow additional deposit accounts to be taken out.
That deals with short term cash holdings, but what about investors who decide to hold cash in fixed rate bonds? Do personal accounts really pay a better rate?
Our research shows the differential between table toping best buy accounts grows wider for longer term fixed rates. For example, over one and two years, there is no difference between the best personal and SIPP deposit account. But over five years the best personal account pays 0.36% more than the best SIPP deposit account.
Furthermore, the recent introduction into the personal savings market of seven year fixed rate bonds from the likes of the Skipton Building Society and First Save hasn’t been mirrored in the SIPP market. Although this isn’t too much of a loss, the merits of a seven year fixed rate in the current climate are highly debatable anyway.
Term Best personal savings rate Best SIPP deposit account rate
1 year fixed rate 2.00% Birmingham Midshires 2.00% Bank of Baroda
2 year fixed rate 2.30% Punjab National Bank 2.30% Punjab National Bank
3 year fixed rate 2.60% Aldermore 2.55% Punjab National Bank
4 year fixed rate 2.76% Vanquis Bank 2.60% Punjab National Bank
5 year fixed rate 3.11% Secure Trust Bank 2.75% Punjab National Bank
7 year fixed rate 3.50% Skipton Building Society None
Whilst personal savers have a wide range of banks and building societies offering savings accounts, SIPP deposit account investors have a relatively limited choice.
Whilst the differential between the top paying personal and SIPP deposit accounts might be relatively small, the gap widens when we consider the average rates paid by the top five accounts. This proves the lack of depth in the SIPP deposit account market.
We looked at the average interest rate on the top five personal and SIPP deposit accounts and found the rates on personal accounts are higher for every type of fixed rate, with the gap widening significantly for longer terms.
Term Average of top five personal accounts Average of top five SIPP accounts Difference
1 year fixed rate 1.98% 1.88% 0.10%
2 year fixed rate 2.29% 2.17% 0.12%
3 year fixed rate 2.56% 2.40% 0.16%
4 year fixed rate 2.66% 2.31% 0.35%
5 year fixed rate 3.06% 2.54% 0.52%
So why do SIPP savers get lower interest rates?
Whilst the differential is small on short term fixed rates of up to three years, the gap widens significantly over four and five years; very popular durations for many SIPP investors who often want certainty of returns.
There are a number of reasons why the differential exists:
- Simple supply and demand; fewer banks and building societies taking deposits from SIPPs means less competition and lower rates
- Some banks and building societies believe the tax exempt nature of a SIPP means they can get away with paying lower rates
- Banks and building societies see SIPP money as ‘sticky’, once it’s in a pension it can’t move out, with the obvious exception of buying an Annuity. Furthermore, institutions believe that a cautious investor will always be so and therefore tend to use deposit accounts rather than looking at alternatives
So, are SIPP deposit investors treated as second class savers?
For instant access and fixed rates of up to three years the answer is probably not, but for longer term fixed rates, then we have to say probably yes.
Whatever term you choose, it is true to say that there is less choice of deposit accounts which can opened within a SIPP, compared with those available for personal savers.
We at Investment Sense keep in close contact with deposit institutions, and support the principle that there should be no difference in the treatment offered to depositors, whether personal or through a SIPP.
We will continue to campaign for a wider choice for SIPP cash investors, as well as trying to persuade the wider SIPP industry to be more transparent when it comes to the interest they retain from the mandated SIPP account.