As banks come under increasing pressure to reduce mortgage rates, interest rates on SIPP deposit accounts have fallen steadily over the past couple of weeks.
We know many investors only hold Cash in their SIPP, the recent rate cuts could therefore cause significant financial pain especially when existing rates mature and the number of competitive accounts are limited.
So, if you are a SIPP cash investor, what can you do to improve the return?
1. Fixed rates
Savers are normally rewarded with higher interest rates in return for tying capital up for longer periods of time; the same is true for SIPP deposit accounts.
The best one year fixed rate SIPP deposit account, with FSCS coverage, is from Julian Hodge Bank and pays 3.35%, quite significantly lower than the best five year fixed rate from the Punjab National Bank, which is also covered by the FSCS, and pays 4.50%.
You need to be careful though, committing to a long term fixed rate, of say between three and five years, could leave you stranded in an uncompetitive account that you can’t get out of, if interest rates start to rise.
It’s for this reason that we are seeing many SIPP investors prefer shorter, one and two year fixed rates, giving them more flexibility over the next couple of years should rates rise.
2. Consider differ banks & building societies
It’s probably fair to say that banks such as the State Bank of India, the Punjab National Bank and Bank of Baroda are not names that roll off the tongue when you are considering which SIPP deposit account to open, but we’d urge you to look again.
All three are FSCS covered, with some market leading rates.
There are also some smaller building societies offering very competitive SIPP deposit accounts.
At a time when interest rates are falling we’d urge you to consider banks and building societies that are maybe new to you and you’ve not used before.
If you are unsure about using a new institution, then try them with a relatively small deposit, if the service is good and you are happy with how things go, then consider increasing your holding.
3. Non FSCS covered accounts
We find that most SIPP deposit investors prefer to use banks and building societies covered by the Financial Services Compensation Scheme (FSCS) and that by doing so they have not had to compromise too much on the interest rate. Most investors know that the FSCS covers an individual up to £85,000 per institution, although less people know that personal savings are added to money held in SIPP deposit accounts.
As rates fall though, it might be worth checking out other banks, who are members of alternative compensation schemes.
It is of course hugely important that you understand and are happy with any alternative compensation schemes, before you invest; you can find links to the main ones here:
Isle of Man’s Depositors’ Compensation Scheme
Guernsey Banking Deposit Compensation Scheme
Eligible Liabilities Guarantee Scheme
4. Different types of accounts
If interest rates continue to fall it might be worth considering other options, for example accounts with stepped interest rates or fixed rate accounts which allow you to exit if rates rise.
Currently the State Bank of India are the only bank to offer a stepped rate and RBS the only one who will allow you to break a fixed rate period, but keep your eyes open, new accounts will appear and when they do we’ll add them to our best buy table.
5. Consider alternative options
If you’ve previously saved into Cash and are now unhappy with the returns you could look to invest into other assets such as equities, corporate bonds or gilts, either directly or through a fund. Such a move would of course mean taking more risk and putting up with greater volatility, but it may help to boost your returns, although there is of course no guarantee of this.
You could also consider deposit based Structured Products.
Whilst more complex than a typical deposit account these types of investment provide a return linked to the stock market, usually the FTSE, whilst guaranteeing your capital. Because they are deposit based they are covered by the FSCS should the issuing bank collapse.
These are certainly more complex than your average deposit account, you’ll have to tie up your money for between three and six years and if index to which they are linked fails to perform you could end up losing money in real terms, as you will simply get your capital back.
In the effort to improve returns both options might be worth a look, even if you then dismiss them having weighed up the pros and cons.
6. SIPP charges
If you ran a business and your income was hit, you would probably look to reduce costs, the same should be true of your SIPP.
The SIPP market is continually evolving, with new products regularly being launched. If you’ve not reviewed your provider for a while it’s probably worth doing.
Ask yourself:
- How much am I being charged now?
- Is this value for money?
- Could I reduce costs by moving elsewhere?
Be careful though, some SIPP providers charge hefty exit fees, the SIPP Zone section of our website will show you what your current provider will charge you to leave.
Next steps
If you are a SIPP cash investor you are going to have a challenging few months.
Following our six tips should help, but if you need more ideas then our team of SIPP advisers are here to help.
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 info@investmentsense.co.uk
