Holding cash in a personal pension

m_c_s

IGLT iShares Core UK Gilts UCITS ETF 10yr avg bond ytm=4.29%

IGLS iShares UK Gilts 0-5yr UCITS ETF very low risk ytm=4.13%

ERNS iShares £ Ultrashort Bond UCITS ETF mainly corporate bonds of less than 1yr duration ytm=3.57%

There will be some volatility in the fund price for the top two ETFs but 4+% return virtually guaranteed is something we have not had for many years.

Albermarle

pdiddy64 said:

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?

Not sure why you are picking on SIPP providers. Most traditional personal and workplace pension providers, which I guess most people still have their pension with, do not have the facility to hold cash at all AFAIK.

Stargunner

m_c_s said:

IGLT iShares Core UK Gilts UCITS ETF 10yr avg bond ytm=4.29%

IGLS iShares UK Gilts 0-5yr UCITS ETF very low risk ytm=4.13%

ERNS iShares £ Ultrashort Bond UCITS ETF mainly corporate bonds of less than 1yr duration ytm=3.57%

There will be some volatility in the fund price for the top two ETFs but 4+% return virtually guaranteed is something we have not had for many years.

IGLT is down 25% over the last 12 months.
IGLS is down 7% over the last 12 months
ERNS is down 0.6% over the last 12 months.
Doesn’t seem like a virtually guaranteed 4+% return to me.

Neversurrender

I have approx £50,000 in cash in my Sipp portfolio.
My intention is to take £16,666 out each financial year for the coming 3 years starting April 2023
It hurts me that the interest offered is pitiful
I am holding it in cash as I will be needing it over the next 3 years and don't want it to go down then crystallise a loss.

So reading this thread would anything similar suffice for my situation?

MiserlyMartin

Stargunner said:

m_c_s said:

IGLT iShares Core UK Gilts UCITS ETF 10yr avg bond ytm=4.29%

IGLS iShares UK Gilts 0-5yr UCITS ETF very low risk ytm=4.13%

ERNS iShares £ Ultrashort Bond UCITS ETF mainly corporate bonds of less than 1yr duration ytm=3.57%

There will be some volatility in the fund price for the top two ETFs but 4+% return virtually guaranteed is something we have not had for many years.

IGLT is down 25% over the last 12 months.
IGLS is down 7% over the last 12 months
ERNS is down 0.6% over the last 12 months.
Doesn’t seem like a virtually guaranteed 4+% return to me.

Exactly what I was thinking. All my gains in stocks have been wiped out by my 30% losses in gilts and bonds over the past year. A hard lesson learned.

masonic

Neversurrender said:

I have approx £50,000 in cash in my Sipp portfolio.
My intention is to take £16,666 out each financial year for the coming 3 years starting April 2023
It hurts me that the interest offered is pitiful
I am holding it in cash as I will be needing it over the next 3 years and don't want it to go down then crystallise a loss.

So reading this thread would anything similar suffice for my situation?

Individual gilts maturing at the appropriate time would be the best bet. When held to maturity, your return will be unaffected by whatever happens in the bond markets. It would be worth transferring somewhere that would allow you to do this if your current provider does not.

pdiddy64

Masonic

Most of your arguments are contradictory and obviously made to distract the argument.

Your final point about bonds being a good deal really gives the game away! Most people would agree that bonds are one of the most risky investments of all at the moment (especially those with indexation or long duration).

SIPP providers generate a great deal of profit from ripping clients off with poor returns on cash, that is just a fact. Changing this would remove the distortion in the SIPP industry, not create a distortion elsewhere. 

The point about company pension schemes and the wider pension industry doing the same thing has some validity but it is not quite as bad there at all. For example, my workplace pension offers a guaranteed 7% equity based scheme. There are also many other schemes that are actually quite generous. Also, why should the fact that this is an industry wide con prevent us from reining in this poor behaviour in the SIPP area? We have to start somewhere.

Maybe many of us will not stand to gain much from any change - but at least we could be helping those who follow in years to come.

Please tell me if you think I am being naive or just wrong.

masonic

pdiddy64 said:

Masonic

Most of your arguments are contradictory and obviously made to distract the argument.

That's simply untrue. If you don't like the arguments I've made, then feel free to post your critique. However, do not engage in personal attacks on my intentions.

pdiddy64 said:

Your final point about bonds being a good deal really gives the game away! Most people would agree that bonds are one of the most risky investments of all at the moment (especially those with indexation or long duration).

This makes no sense, and if anyone is playing a game it isn't me.

UK Government bonds are one of the safest assets available. The UK has never defaulted on its debt obligations, and frankly isn't going to do so (yes, once it changed a coupon on its War Loan, and yes it borrowed from the USA after WWI and didn't pay it all back). That means, when you buy a gilt, long duration or short, index linked or nominal, you are buying a defined set of cash flows that are locked in at the point of purchase to the point they mature. Provided you hold the bond to maturity, your return is locked in at the point of purchase.

You are probably confusing bonds with bond funds. Bond funds are financial instruments that trade bonds. These carry risk, because the fund carries on buying new bonds when older bonds mature, meaning a bond fund investor will never see their principal returned unless they sell their units in the bond fund at the current market price, driven by the secondary market for bonds. I, along with several others on this forum, have been sounding the alarm about bond funds for quite a long time as it was clear what was going to happen when interest rates started to rise. I don't agree that bond funds are one of the most risky investments of all at the moment, they were last year and now the bubble is pretty much deflated - not that I'd countenance jumping in right now.

pdiddy64 said:

SIPP providers generate a great deal of profit from ripping clients off with poor returns on cash, that is just a fact. Changing this would remove the distortion in the SIPP industry, not create a distortion elsewhere.

It's not a fact. SIPP providers have to hold client money in a segregated cash account with a mainstream bank. This account is often interest bearing, but at quite a low rate. SIPP providers do pass on interest to clients with larger cash balances. The money is treated in this manner because of the FCA's client money regulations. There is no distortion, nor "a great deal of profit" earned on this money.

pdiddy64 said:

The point about company pension schemes and the wider pension industry doing the same thing has some validity but it is not quite as bad there at all. For example, my workplace pension offers a guaranteed 7% equity based scheme. There are also many other schemes that are actually quite generous. Also, why should the fact that this is an industry wide con prevent us from reining in this poor behaviour in the SIPP area? We have to start somewhere.

I don't really understand what you mean by this, but as I didn't raise this point, Albermarle is welcome to pick it up.

pdiddy64 said:

Please tell me if you think I am being naive or just wrong.

You probably just need a better understanding of SIPPs and bonds.

pdiddy64

Hi Masonic

Thanks for an intelligent response and I didn't mean to offend so apologies if I did.

I have a reasonable understanding of the area but am certainly not an expert.

You are absolutely spot on that bonds are extremely different to bond funds. Are you aware that it is very difficult to invest in individual bonds within low cost SIPPS? Account holders are shepherded into buying bond funds. If you look through all of the investment literature all it talks about is bond funds. I don't think I have ever read an article about an individual company bond. The same applies to gilts. The point is identical to the issue with cash. Individual investors in low cost SIPPs cannot access the good deals. This will change with time as investors become more astute and providers are forced to offer individual bonds - almost the opposite of what happened with mutual equity funds many years ago. Please can we leave bonds totally out of this as it just distracts from the point about cash held in SIPPs. 

As far as SIPP providers not passing on the interest I think you need to do a little research. The minimum amount a SIPP provider would receive is the risk free rate (i.e. BoE base rate). There will not be a SIPP cash account in the whole country where the provider does not receive that minimum rate. The accounts will be segregated, as you say, but I think you will find the interest reward will be collective (i.e. a % of a lot of money). Independent research suggests that 27% of SIPP providers' profits come from interest earned on cash deposits. It is an industry scandal and needs to change. I forecast that a new provider will arrive to change things or an existing company will "break out" and the pack will have to follow. There could even be legislation to force SIPP providers to declare and pass on interest earned.

From personal experience, I have a SIPP account with iWeb. The account paid BoE base rate for the first two years that I held it. From September this year iWeb changed the return from the BoE Base rate (currently 2.25% to 0.3%). An arbitrary change which was to 'help them keep other costs down". They were previously able to cover providing a BoE base return but are now just refusing to pass on that interest to their clients. This is definitely a fact for all of their clients and just brings us into line with the other rip off merchants.

Why are you arguing for a continuation of people's cash receiving appalling low returns? How can that be fair? We can help future generations if we raise awareness of this issue and force SIPP providers to give all clients a fair deal on their cash deposits. Surely, that cannot be a bad thing.

Neversurrender

pdiddy64 said:

Masonic

Most of your arguments are contradictory and obviously made to distract the argument.

Your final point about bonds being a good deal really gives the game away! Most people would agree that bonds are one of the most risky investments of all at the moment (especially those with indexation or long duration).

SIPP providers generate a great deal of profit from ripping clients off with poor returns on cash, that is just a fact. Changing this would remove the distortion in the SIPP industry, not create a distortion elsewhere. 

The point about company pension schemes and the wider pension industry doing the same thing has some validity but it is not quite as bad there at all. For example, my workplace pension offers a guaranteed 7% equity based scheme. There are also many other schemes that are actually quite generous. Also, why should the fact that this is an industry wide con prevent us from reining in this poor behaviour in the SIPP area? We have to start somewhere.

Maybe many of us will not stand to gain much from any change - but at least we could be helping those who follow in years to come.

Please tell me if you think I am being naive or just wrong.

So are bonds in mixed asset funds like Vanguard Lifestrategy  etc.. also a bad deal, or is it just stand alone bond funds?