Holding cash in a personal pension

Aged

Given that interest rates on cash deposits are something like 4% at the moment, are options available within a pension wrapper to hold cash at these rates?

adindas

Aged said:

Given that interest rates on cash deposits are something like 4% at the moment, are options available within a pension wrapper to hold cash at these rates?

I do not think you could get tha much interest rate in cash held in pension wrapper. There was a previous in Vanguard SIIP you could get a little bit interest for less than 2%.
If you want to get higher interest, hold it in easy access saving accopunt, regular account and deploy it to pension wrapper before the start of new tax year.

masonic

It depends on your pension wrapper, but you could buy individual gilts and hold them to maturity to get an equivalent risk free rate of return.

Alistair31

masonic said:

It depends on your pension wrapper, but you could buy individual gilts and hold them to maturity to get an equivalent risk free rate of return.

How does this work in practice? I have cash in my iweb account that I would like to use in this way. 

masonic

Alistair31 said:

masonic said:

It depends on your pension wrapper, but you could buy individual gilts and hold them to maturity to get an equivalent risk free rate of return.

How does this work in practice? I have cash in my iweb account that I would like to use in this way. 

Much the same as trading shares, although I don't know if iWeb allows online trading of gilts, someone else mentioned being redirected to deal by telephone, though this might have been a temporary thing. Gilts have ticker codes such as TNxx or TRxx where the last two digits are the year of maturity.

Albermarle

Best cash savings interest rates for a SIPP? — MoneySavingExpert Forum

Daliah

I have never bought gilts and am not sure I understand them.

Would someone who does please explain, using TR32 as an example. If I buy £1,000 worth of TR32 on Monday, will I get £1,000 back on 07/06/2032, and 4.25% of £1,000 as coupon [in cash back to my SIPP] every year between now and then?

aroominyork

Daliah said:

I have never bought gilts and am not sure I understand them.

Would someone who does please explain, using TR32 as an example. If I buy £1,000 worth of TR32 on Monday, will I get £1,000 back on 07/06/2032, and 4.25% of £1,000 as coupon [in cash back to my SIPP] every year between now and then?

You will get those returns if the gilt is trading at par, ie at exactly £100. TR32 shows on the LSE website as trading at 100.20 so the effective coupon/interest rate (the "running yield") is 4.25/100.20% = 4.24%. If it were priced at £95 it would be 4.47%. (PS. As masonic points out below, also adjust the capital repayment on maturity.)

masonic

Daliah said:

I have never bought gilts and am not sure I understand them.

Would someone who does please explain, using TR32 as an example. If I buy £1,000 worth of TR32 on Monday, will I get £1,000 back on 07/06/2032, and 4.25% of £1,000 as coupon [in cash back to my SIPP] every year between now and then?

You happen to have picked a gilt that is trading pretty much at face value (bid price is £100.90 for £100 face value), so the answer is close to a yes. In fact it trades just above face value, so you'd get 4.22% interest per year on the premium price you paid (this is the running yield) and slightly less than £1000 back at the end (about £991). The yield to maturity would therefore work out at somewhere around 4.12% per year.

There are gilts with a much lower coupon, such as TG31, where the coupon is 0.25%, but which trades at a price well below face value (£71.47 for £100 face value), so you'd get 0.35% interest per year based on the discounted price you paid, followed by a 28.5% tax exempt capital gain at maturity. Overall this would give you a similar return, but a different split between taxable interest and tax exempt capital gain, which may be preferable if held outside of a tax wrapper.

aroominyork worked on a spreadsheet to calculate the yield to maturity more accurately using the XIRR function, than my rough figures above, see https://forums.moneysavingexpert.com/discussion/comment/79524680#Comment_79524680

pdiddy64

The lack of provision of cash products within SIPPs is nothing short of a national disgrace. SIPP providers deliberately avoid providing them because:

a) They can trouser most of the interest made on cash held in people's SIPPs.
b) The lack of interest acts as an incentive for people to invest in other products thereby generating the SIPP provider more revenue.

The only way I am aware of getting around this is to switch to a more sophisticated (and thereby more expensive) provider who will be able to offer suitable cash SIPP products.

There is absolutely nothing to stop low cost SIPP providers linking up with acceptable cash products for the benefit of the SIPP holder community.

My own view is that one low cost provider will eventually do this and the game will be up. The cash SIPP world will then move into a competitive marketplace, just as it always should have been.

This is a particularly important matter at the moment as cash returns seem likely to escalate whilst equity and bond outlooks do not look good at all. The recent wild currency swings also raise the issue of why SIPP investors cannot hedge currency risk as they see fit (i.e. invest in USD and received USD interest without exorbitant exchange charges). Slightly more complicated but something SIPP providers could easily offer.

Does anyone have any proposed solutions or views?

masonic

Hardly a national disgrace. I'd much rather lenders reserve savings products for direct sale to retail consumers rather than package them up into financial instruments that can be used by institutional investors, who would flood in and drive down the rates on offer.

Some providers already pay a share of interest they receive on cash sitting in their client money account. That's never going to be competitive with a fixed term savings account offered by a building society or small savings bank, which needs to pay a higher rate to attract sufficient funds from active savers.

You can already get a risk-free 4+% if your SIPP provider allows you to trade bonds. Funds with currency hedging already exist and only charge a small premium on the unhedged equivalent. What more is needed?