In the past 18 months, market volatility has seen a shift towards a greater proportion of SIPPs being held as cash as investors seek consistent returns and lower risk.
However, research we recently conducted with pension IFAs reveals that many SIPP investors are still over-weight in higher risk assets, such as equities, in the years immediately prior to their retirement. Indeed, at retirement clients typically have 58% of their pension fund as cash, but advisers believe that by retirement, closer to three quarters (74%) of a fund should be in cash.
| Time from retirement | Proportion that should be allocated to cash | Proportion that is allocated to cash | Difference |
| 5 years before | 26% | 15% | 10% |
| 4 years before | 33% | 20% | 13% |
| 3 years before | 44% | 26% | 18% |
| 2 years before | 55% | 36% | 19% |
| 1 years before | 66% | 43% | 23% |
| At retirement | 74% | 58% | 16% |
The shift overall that has been seen towards cash is a trend that is illustrated, however, by research we commissioned in September 20091, with Defacto which found that in the past 12 months over half of pension administrators surveyed had witnessed an increase in the proportion of cash allocated to clients' SIPPs. Nearly a quarter of administrators (23%) said that they had typically witnessed an increase of up to 25% amongst their clients. However, a further 13% of pension administrators reported an increase in the amount allocated to the cash element of their clients' SIPPs of between 26% and 50%.1
In a separate survey of IFAs specialising in pensions2, we found that 42% of those who have seen their SIPP business increase over the last 12 months attribute it to investors wanting greater control of their pension investments2. However, in terms of the amount invested, a quarter of the IFAs we interviewed estimate that their clients have between £100,000 and £250,000 of cash in SIPPs and almost one in 10 estimate that their clients have between £250,000 and £500,000 deposited as cash. Around 5% of IFAs say that on average clients have over £500,000 as cash in their pension fund2.
Despite the size of the deposits, our analysis shows that many investors with SIPPs are receiving very low returns on their cash SIPP accounts. As at September 2009, the average return on cash balances of £1,000 was just 0.13% gross AER as a result of accounts tracking the downward path of the Bank of England base rate over the past year1.
| Balance held in cash within SIPP | Average interest rate paid on cash gross AERs (April 2006) | Average interest rate paid on cash gross AERs (Sept. 2007) | Percentage change (2006-2009) |
| £1,000 | 3.08% | 0.13% | ↓ 2.59% |
| £5,000 | 3.20% | 0.13% | ↓ 3.07% |
| £25,000 | 3.45% | 0.13% | ↓ 3.32% |
| £100,000 | 3.79% | 0.19% | ↓ 3.60% |
| £250,000 | 3.80% | 0.21% | ↓ 3.59% |
| £1 million | 3.86% | 0.24% | ↓ 3.62% |
| UK base rate | 4.5% | 0.5% | ↓ 4.00% |
Our research with IFAs provides further evidence of the fact that returns on cash deposited by SIPP investors are unacceptably low2. The survey reveals that over a quarter (28%) estimate that on average their SIPP investors receive 1% or less interest on their cash deposits and 14% of SIPP investors receive the Bank of England base rate or less on their cash deposits.
With just over a third of pension advisers reporting an increase in SIPP business over the last 12 months, the number of savers missing out on higher returns on their pension cash is only likely to increase.
One of the reasons why SIPP accounts tend to offer low rates of interest is that they are not the key focus for many investors. Furthermore, although there are many ‘best-buy' tables and websites promoting cash rates on standard savings accounts, there is very little information available on the returns paid on cash by different SIPP bank accounts. Additionally, a number of administrators and pension trustees are tied to their SIPP provider and have no choice but to accept their stipulated returns on cash.
Increased transparency around rates would help to ensure that investors and their advisers are able to make more informed decisions when choosing a SIPP in order to maximise returns.
The SIPP market is becoming increasingly competitive, so providers should be looking to offer more attractive returns on cash as a way of differentiating their proposition and growing their client base. If providers continue to offer poor rates of return on the cash element of their SIPPs, we believe it is likely investors may believe that other areas of a provider's proposition are also weak and will seek an alternative solution.
The SIPP market appears set to continue growing and with this will come greater analysis of products on offer and particularly the rates of interest paid on cash - both of which can be easily evaluated. Low rates are likely to be increasingly criticised as they are hard to defend even with a low base rate. Banks should act to avoid this criticism and to provide a consistently fair rate for its customers and we would urge investors, particularly those with cash balances of £100,000 or more, to check the rate of return they are receiving on their cash and to move it to an account paying a competitive rate of interest.
(1) Defaqto reviewed 84 SIPP accounts on 11 September 2009
(2) George Street Research Limited was commissioned to conduct interviews with 100 Independent Financial Advisers who are pension specialists between 3 - 10 September 2009
