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The pension cash catch

Retirement | SIPP

By Justin Modray, published 12 March 2010.
Helpful? 4

You may not pay much notice to pension cash accounts. But if you're nervous about markets or approaching retirement they should form the backbone of your pension fund. Yet, based on current rates, they'll almost certainly lose you money.

If you have a money purchase pension (whether occupational, stakeholder or sipp) you’re bound, at some point, to want to hold cash.

When it’s only a small amount for a short period then the rate of interest paid is fairly inconsequential. But hold a large sum for more than a few weeks, perhaps as you approach retirement, and the rate you earn could make a difference of hundreds or even thousands of pounds.

With the Bank of England Base Rate at 0.5% you wouldn’t expect cash in a pension fund to be earning much at the moment. But, given some conventional saving accounts currently pay up to 3% a year, you might expect say, 1% or 2%?

Wrong. Try almost zero, because if you own a low cost self-invested personal pension (sipp), which usually ties you to a single bank account, then that’s what you’ll probably earn. The pension providers must be laughing all the way to the bank, literally.

Sipp Cash Account Annual Interest Rates

Sipp ProviderRate on £10,000Rate on £50,000
James Hay 0.00001% 0.00001%
Sippdeal 0.05% 0.10%
Cofunds 0.10% 0.10%
Hargreaves Lansdown 0.10% 0.25%
Fundsnetwork 0.65% 0.65%
Rates correct as of 12 March 2010

If you’re paying higher charges for a fully flexible sipp then you can probably choose whichever eligible bank account you fancy, for example the Investec Pension and Trust Reserve Account paying 1.98% (1 month notice, minimum £25,000), but then sipp charges might outweigh interest earned.

Alternatively you could invest in cash funds, which aim to mimic a savings account but are arguably less safe - Threadneedle, Standard Life and Prudential cash funds all lost money during the 2008 banking crisis. A typical cash fund currently yields around 0.4% after charges, better than most sipp bank accounts but not by much.

If you have a stakeholder or conventional personal pension then one of these funds will likely be your only cash option, meaning at current rates you’ll probably lose money after paying typical annual pension charges.

So, whichever route you take, it looks like holding cash in your pension will currently lose you money. Any clever solutions? I can’t think of any. The best I can come up with is to hold relatively cautious investments instead and keep your fingers crossed – not very satisfactory if you’re a year away from retirement.

If anyone has any bright ideas please post them below. I’m sure some readers could benefit!

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