We are getting more and more enquiries about which deposit accounts can be held in a SIPP (Self Invested Personal Pension).
There seems to be a good deal of confusion about the topic so we thought we would take another look and see if we can help you steer a path through the complex world of SIPPs and deposit accounts.
The basics
Let’s start with some simple stuff.
A SIPP is a form of Personal Pension which has wider investment powers. For example it can invest directly into shares or buy property, SIPPs can also hold deposit accounts.
The list of permitted investments is drawn up by HMRC, and it is from this list that SIPP providers must decide which assets they will allow their SIPP members to invest in. As we will see later, just because HMRC allow an asset in a SIPP this does not necessarily mean that your chosen SIPP provider will find it acceptable.
Some SIPPs can be opened directly with the SIPP provider; others can only be accessed via an IFA.
Why would you want to use a deposit account in your SIPP?
Many people would argue that cash investments underperform the stock market and struggle to keep pace with inflation.Whilst there is merit in these arguments there are a number of circumstances where an investment into cash can make perfect sense. Some possible examples:
1. When you want no capital risk and do not want the fluctuations in value which come with investments into other assets such as stocks and shares. The caveat to this is of course that if you invest in a single or series of deposit accounts, you should take into account the relevant compensation scheme that your bank or building society is a member of
2. You may wish to protect the fund from falls in value before an event which requires your capital. Two examples, you arewanting to buy a property in your SIPP but have currently not found the right one, you plan to retire and do not want the value of your SIPP and tax free lump sum (also known as pension commencement lump sum) to fall in value before you finish work. These are just two examples of where a fall in the capital value of your SIPP would be undesirable
3. As the stock market became more volatile in 2008 many people who had Personal Pensions sought shelter in the Cash fund of their pension. This worked fine until interest rates fell, or should that be plummeted, to all time lows. With Bank Base Rate at 0.5% it is hard for pension funds investing in Cash to produce a return above the Annual Management Charge
Who offers ‘SIPPable’ deposit accounts?
SIPPable deposit accounts are offered by banks and building societies based both here in the UK and offshore, principally in Ireland, the Isle of Man and the Chanel Islands.
The main thing to remember is that your SIPP cannot normally open the same accounts that you can as an individual. Generally a SIPP can only open deposit accounts specifically designed for SIPPs.
The range of accounts available to SIPPs is certainly more restricted than accounts you can open individually, however getting information on which accounts were available to SIPPs was never particularly easy, which is why we produced our own best buy table called Accounts for Pensions .
The table is free to use and updated regularly.
Do all SIPPs allow me to use these accounts?
Remember we said that a SIPP has wider investment powers? This is of course true, but not all SIPP providers allow every bank or building society account on our best buy table into their SIPP.
When it comes to deposit accounts SIPP providers generally fall into one of three camps.
Firstly there are a range of SIPP providers who will only offer a basic bank account and may on occasion offer deposit accounts from selected providers. One of the largest SIPP providers in the UK, Hargreaves Lansdown, fall into this category. The highest level of interest on the Hargreaves Lansdown SIPP bank account is reserved for those with savings in cash of over £50,000, but even savers with this amount of money in cash only get 0.25% interest per annum; half the Bank of England Base rate.
The second group of SIPP providers work from a panel of bank or building societies but still do not allow unrestricted access to all SIPPable accounts.
The final group allows unrestricted access to any SIPPable bank or building society account.
A word about compensation
Many SIPPable deposit accounts are covered by the UK Financial Services Compensation Scheme (FSCS). However the £85,000 limit applies to you and your SIPP not both, for example if you held £50,000 savings with a particular bank, only the first £35,000 of your savings with that bank via your SIPP would be covered.
Many of the providers of SIPPable bank or building society accounts are based offshore; you therefore need to be comfortable with the compensation regimes which are applicable before you take out such an account.
To help you our best buy table shows which banks and building societies are members of which compensation schemes.
Summary
A few points to remember if you are considering investing in a deposit account via your SIPP:
1. Not every bank or building society account can be opened by a SIPP
2. Not every SIPP will allow you to access every SIPPable deposit account
3. Keep an eye out for the compensation scheme that your chosen bank or building society is a member of
4. Consider your other cash savings outside your SIPP
