Cash is King, was the old saying, and then it wasn’t if you were looking for a good return. But now the good times are back, and interest rates are at their highest for 14 years.
However, the options to take advantage of interest rates within pensions seem to be more difficult. In this article, we’ll explain how cash can be used as part of an overall investment strategy and how to access the products on offer.
Key Takeaways
Cash in pensions can offer a good risk-free return*
However, there may not be long to take advantage of current rates as inflation eases
Inflation risk is a concern with cash in pensions, and there may be potential for higher returns elsewhere.
Alternatively, investing in a money market fund can be a low-risk option with the potential for higher returns, but factors such fund management charges should be considered.
Cash Rates on Pension Accounts
As is common with mainstream banks, many pension providers have been sluggish in reflecting higher interest rates to the cash held on pension accounts.
Self-Invested Personal Pension (SIPP) accounts are typically not intended to store large cash sums over an extended period. Instead, they serve as temporary repositories for funds awaiting investment. They offer liquidity for facilitating charges and can also act as a transfer account for inbound and outbound transfers.
With the recent rise in the Bank of England base rate, a growing number of investors are now keenly aware that strategically holding cash could be a viable part of their overall investment portfolio. However, it’s worth noting that, given the historical returns, maintaining cash for lengthy periods is not generally recommended when compared to investing.
The following are the current interest rates various pension providers offer for cash stored in their accounts.
Typically, these accounts are not designed to store substantial sums of money and have been traditionally employed as intermediary accounts during the process of selling one investment to purchase another. Therefore, being cautious about the limits set by the Financial Services Compensation Scheme (FSCS) is crucial. Some providers might increase the number of protective layers by using multiple banks, but it’s always wise to thoroughly review the fine print. It’s worth noting that the FSCS compensation limit is set at £85,000.
Fixed Term Deposits
Another option for cash on pension accounts is to be fixed into a rate for a longer period. Much the same as you can fix money in a bank account for a longer period and attract a better interest rate through fixed-rate bonds, you can do the same in a pension. The product is known as a fixed-term deposit. The lack of understanding around this account probably stems from very few providers offering or promoting them.
Over the past decade, the rates on fixed-term deposits meant they didn’t offer any real return versus inflation. However, we are seeing an increased demand from both clients and new enquiries about how to access them.
The way they tend to work is a platform provider will offer access to a number of companies that offer these within a SIPP. Some platforms make it easier to access them by having a cash panel, whereas other providers offer them as an off-platform option, only if you ask.
The income or return from fixed term deposits is paid at the end of the term rather than monthly, and unlike fixed rate bonds which can be exited early to forfeit interest, these can’t. You really need to be sure you don’t need the amount for the chosen term.
Guaranteed Drawdown
There is another way of utilising interest rates while keeping your money in a personal environment. Sometimes referred to as guaranteed drawdown, the official name is a fixed-term annuity.
This is a halfway house between an annuity and drawdown. You can fix your pension for a term of between 3 and 25 years. Choose whether you want to take an income or not (and can specify the amount you want), and then an interest rate is applied to the fund.
If the concept of locking money up for a period to enjoy higher interest rates doesn’t suit your access needs, there are money market funds. These offer a low-risk way to invest in short-term debt securities, certificates of deposit and commercial papers. The returns typically follow the Bank of England base rate with very few surprises. As they are funds, the investment can be accessed at any point or left alone indefinitely.
When compared to other investment styles, Money Market risk sits at the bottom.
What Other Investment Options Can I Consider for My Pension Apart From Cash?”
You could consider investing in stocks, bonds, or real estate. Diversifying your portfolio can help manage risk. Researching and understanding each option is essential before deciding where to allocate your pension funds.
How Will Inflation Affect Cash Investments in My Pension?”
Inflation can erode the value of your cash investments over time. If inflation rates exceed interest rates, you’re effectively losing money. It’s crucial to consider this when planning your pension investments.
Is It Advisable to Invest My Entire Pension in Cash?”
While putting all your eggs in the cash basket is tempting due to current high-interest rates, diversification is key. Don’t risk your nest egg on one strategy; the economic climate can change quickly.
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