There’s no getting away from it, over the past few years, since the financial crisis of 2008, life has been hard for savers.
Government and Bank of England policy has mean that interest rates have hit record lows and show no sign of increasing, whilst inflation has been a constant concern, threatening hopes of ‘real’ returns.
It is often said that it is hard for savers to become investors, usually because they can’t accept the risk to their capital investing brings. This probably explains why so many savers have continued to keep their money in bank and building society accounts, trying desperately to find the best rates.
But, there is one group of savers who face even greater challenges.
SIPP cash savers.
To put it another way, people who prefer to hold Cash, via deposit accounts, in their pension, generally a SIPP (Self-Invested Personal Pension).
Coupled with the problems all savers face, there are three issues which are making life particularly hard for SIPP cash savers.
SIPP fees rising
Over the past few months we have seen a number of SIPP providers increase their fees.
Many blame new legislation, which has increased the amount of money they need to hold, known as ‘capital adequacy’, which is to be used to aid an orderly transfer of client assets in the event of a SIPP provider going bust.
For most SIPP providers the new rules have meant an increase to their capital adequacy requirement. Some have covered this through existing reserves or profits, others though have increased their fees.
Any rise in fees for a SIPP cash saver is particularly worrying, as the returns from deposit accounts are so slim in the first place.
SIPP providers excluding accounts
The new capital adequacy rules are complex and we don’t intend to try and explain them here. However, they have led to some SIPP providers refusing to allow savers to use fixed term deposits which are not breakable during the term.
To put it another way, if a SIPP saver can’t access their three or five-year, for example, fixed rate account, then some SIPP providers won’t accept it.
This stance, taken by some, although not all, SIPP providers, has reduced the number of banks or building societies savers can consider. Furthermore, the accounts which are breakable tend to have lower interest rates than those which aren’t.
The options for SIPP savers was already limited, but has now been reduced further, partly because of the reasons outlined above, but also because we are no longer seeing new banks and building societies entering the SIPP deposit account market.
Indeed, last month we were told of one building society which was launching a SIPP deposit account, only for it to be withdrawn almost immediately following the Brexit vote.
What options for SIPP cash savers have?
If you are a SIPP saver caught in the eye of the perfect storm you have two main options:
Carry on: If you are a saver who is prepared to take no capital risk, then keeping your money in Cash is the only option you have.
A word of caution though, if inflation were to rise above the rate of interest you are receiving, the value of your capital will be eroded. Whilst it may look like you have the same amount of money, indeed it will be higher with the addition of interest, the buying power of your capital will be reduced. If this were the case, you are in effect introducing risk to your capital, even if you are holding Cash.
If you do decide to continue to hold deposit accounts keep an eye on your SIPP fees. We all look at the rates of interest, but tend to review costs less frequently. At a time when SIPP fees are on the rise, it’s important to make sure the fees you pay are as competitive as possible.
Finally, make sure your SIPP provider will allow you to access all ‘sippable’ deposit accounts and don’t restrict your options for their own benefit.
Consider other asset classes: If you are struggling to make a real return from Cash you could of course consider switching from saving to investing. This means holding money in other asset classes such as bonds, property or stocks and shares in the hope of a higher return than you will get from Cash.
Of course, a higher return isn’t guaranteed and the value of your investment could fluctuate significantly.
Remember too that inflation affects investments as well as savings; your aim has to be for a ‘real’ return.
We are here to help
If you are a concerned SIPP Cash saver we are here to help.
We were the first to publish a best buy table of ‘sippable’ deposit accounts back in 2010 and have specialised in SIPPs ever since.
If you would like to talk through your options, we are here to help. Call Bev or Sarah on 0115 933 8433 or email firstname.lastname@example.org