You can put your pension fund into a cash deposit account earning 3% a year or more, guaranteed. But most advisers do not know, or will not say, you can do it. One that does, Mark Meldon of R C Gray, told Saga it was “one of the best kept secrets of the pensions world”.
Putting your money into cash is not popular among financial advisers. Historically that is because they were paid no commission if they recommended it. They earned their money by selling you investments – and the more complex the investment the more they earned. From January that commission bias – as the regulator the Financial Services Authority calls it – should end when such payments are banned for advisers who sell you pensions or investments. But old habits die hard and financial advisers generally still believe that shares or funds or the best place for growth in your money in the long-term – though how long that is can vary from five to twenty years. Very few will say even to older people ‘at your age you should not put your precious pension savings at risk in an investment that can go down as well as up.’
That is partly because many of them simply do not know that you can put your pension fund literally in cash. They tend to think of what insurers call ‘cash funds’ which contain ‘cash like’ investments. They pay dreadful returns of well under 1% and even that can be wiped out by the fee for running the fund. But in fact you can put your pension fund into cash – real cash – in accounts that pay interest rates which are as good as you will get if you take £1000 to the High Street and put it in a deposit account.
First, you convert your pension into what is called a SIPP. That stands for Self-Invested Personal Pension. You can do that if the pension is yours – either a personal pension or one from an ex-employer. Take care with pre-1988 pensions. They may have guaranteed annuity rates and should usually be left where they are. A SIPP, as the name suggests, lets you decide where it is invested. And that investment can be in cash, pure cash, with small but guaranteed returns and, most importantly, a guarantee it will not go down.
There are charges for setting up and running a SIPP. The SIPP provider does the administration and legal documents for your fund. The job is much the same whether you have £10,000 or £10 million. So always go for one with a fixed fee. You can get SIPPs with no set up fee. But there will always be charges somewhere. So keep it simple. One low cost option is Cabot Trustees which works with Bath Building Society. It costs £336 a year (including VAT) and there is a one off set up fee of a similar amount. If you have a financial adviser they will charge too. Cabot is recommended by IFA Mark Meldon of R C Gray. He told Saga Magazine “Deposit based SIPPs are one of the best kept secrets of the pensions world. There is a cost in setting it up – reckon £1000 for adviser and set up fees. But ongoing adviser costs are low - £35 or so each time you reinvest a fixed term bond. People approaching retirement don’t want high risk or complexity. Our clients are delighted they don’t have to worry what investments are up to. My message is sack the insurance company and take control of your money!”
Because the fees are fixed you do need a minimum amount in your fund for it to be worthwhile. If you have £10,000 then an annual fee even as low as £336 is 3.4% of your fund and will take all or most of the interest on that cash. But if you did have, say, £1 million then £336 is a fairly insignificant 0.03%. And even the fees are subsidised by the Chancellor. The SIPP fee is normally taken out of your pension fund. Suppose the fee is £300. You put £300 into your pension fund and the Chancellor immediately adds £75 tax relief to it. So you have £375 in there. Your SIPP provider takes the £300 fee out of that and you still have the £75 tax relief in your fund. So the net cost to you is £225. Mark Meldon says it is probably not worth taking this route if you do not have around £50,000 in your pension fund.
Once you have your SIPP and have transferred your money into it the next step is to pick your cash deposit account which can be put into a SIPP. Like any cash accounts, you get the best rates if you are prepared to tie your money up for five years. Savings rates have fallen recently. But you can still get nearly 4% from UK based banks on a five year savings bond that can be put into a SIPP. If you are not sure that retirement is that far away you can earn less by picking a one or a two year bond at 3.4%. There are also notice accounts – where you can take the money out at any time as long as you give notice. Aim for 2.4%. And for the really uncertain there are instant access accounts where you can decide to retire at any time and convert your pension fund into a pension. Here the best are around 2%.
Like any cash account they are protected by the Financial Services Compensation Scheme which guarantees up to £85,000 in any individual bank. The really cautious who have more than £85,000 will spread it between more than one bank just in case one should go bust. As long as each bank has less than £85,000 the deposit protection scheme will step in and refund the capital and the interest it has earned. Remember that the limit applies to all the cash you have in one bank or building society. So if you have savings in cash too make sure that the total in your SIPP cash and your other cash do not total more than £85,000 in one place.
Spreading money around comes at a cost. Some of it will be in the second best or third best account as you keep each below £85,000. But it is a sensible precaution. Although the Government has ensured no-one lost any money in the past when a bank went bust, there is no indication it would do so again.
When you retire your SIPP can be used as a cash drawdown fund. If you have say £100,000 and you pick a five year fixed bond at 3.5% you can safely draw out the £3,500 a year it earns keeping your fund intact. Money you draw out is taxed as income just as an annuity would be. But remember you can take up to a quarter of your fund at retirement tax free.
For current rates of SIPPable cash deposits see http://goo.gl/Komlu