SIPPs: Why are interest rates on SIPP deposit accounts falling?

Posted on September 7th, 2012 | Categories - News

The interest rates on SIPP deposit accounts have been falling for a few weeks now, although the downward trend has gathered momentum over the past few days.

We all know that Bank of England base rate has been stuck at 0.5% for over three years now, but just what is causing the recent reductions in SIPP deposit account interest rates?

Swap rates

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Swap rates can be described as the benchmark cost of providing a fixed rate deposit account. When swap rates fall, as they have done in recent weeks, then so must the interest rate offered on a specific account if a bank or building society are to maintain their margins.

Swap rates are currently at historic lows, which is clearly having an impact on the interest rates banks and building societies can offer.

Given the current economic outlook, the consensus seems to be that swap rates will continue at their current low levels, meaning that there is little hope for an upturn in SIPP deposit account interest rates anytime soon.

Funding for Lending Scheme

It also appears as though the Bank of England’s Funding for Lending Scheme (FLS), which is designed to encourage mortgage and commercial lending, is actually causing a reduction in SIPP deposit account interest rates.

The FLS is a proving to be a cheaper alternative for banks to raise money on the wholesale market, this in turn is causing swap rates to be reduced further, pushing SIPP deposit account interest rates lower.

Cheaper mortgages

As lenders come under pressure to make mortgage finance more affordable, they can afford to pay less generous rates of interest on deposit accounts, which is one of their key sources of funding. This is clearly starting to feed through to SIPP deposit accounts in the form of lower interest rates.


Our research indicates a feeling amongst some banks and building societies, that they believe the interest rates paid on some deposit accounts have been too high, compared to tracker mortgages linked to low central bank interest rates.

Whilst few people have sympathy for the banks following the credit crunch it is important that they return to profitability and repair their balance sheets. However, as each bank or building society reduces the rates they are paying it means others can follow suite, safe in the knowledge that despite offering lower rates they will still attract deposits.

There then follows a domino effect, which is what we are seeing now to some degree.

What can be done?

If you are a SIPP investor using deposit accounts, the recent rate reductions will be a disappointment, but there are things you can do to offset the lower rates of interest.

We’ve written a blog looking at the options you have if you are affected by the recent interest rate cuts, click here to read it.

Alternatively 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

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