SIPP - Money Market funds question?

Donewithwork1

Having opened a SIPP last month i'm in the middle of transferring my 3x works DC pensions.  All transfers have to be in cash and the first one (325K) is now sitting in my ii SIPP.

Until I decide exactly where to invest long term i'm considering parking the money in either the Royal London STMM fund or, leaving it in a cash account with ii (currently around 4% interest)  Hopefully the other monies will arrive in the next week or two and I plan to do the same with those temporarily.

My question is, how do STMM funds work? How is the interest paid? How best to monitor the returns?  What sort of timeframe realistically can I leave monies in there for?  I am aware that returns will not be as good as being invested in traditional equities/bonds, but even at a 3.5% return it will not be eating into my pot in drawdown

I plan to start drawdown to my PA at the end of April, so could i.......

1)  Place all the money in a STMMF

2)  Crystallise £16,760 and also have this amount in the same STMMF drawing down a monthly income via FAD.

Interested to hear comments and observations.  Thanks.

Secret2ndAccount

If you choose the Acc (accumulating) version of the Royal London Fund, the price will creep up a little bit every day. There is no ex-dividend date. You can hold for a long time or sell any day, and receive a value equivalent to your principal plus interest. The rate is slightly below the base rate so you should currently be looking at >5%.
It's perhaps not as safe as a bank account, but I know of no instance of one of these funds failing to pay out.
You can cash in just as much as you want to pay yourself at any point in time. Weigh up your platform's charge for selling versus the interest you lose if you take out a bigger chunk and leave it as cash in your SIPP.

Sunnylifeover50plan

I have a relatively large amount (for me) in the Vanguard Sterling Short-Term Money Market Fund (VASSTAI)
 - I have it for short term stability in an effort to reduce the risk of volatility while I decide what to do as I approach 55 in a couple of months. I didn't go for the Royal London product mainly because of the frequency of the dividend payment.

The Vanguard fund pays out each month into my SIPP and it's therefore very easy to track the returns.

Downside is spending time out of the market, limiting potential returns and running an inflation risk, but those are risks I chose to accept given my current investment objective. I still hold an equity/ bond fund which keeps a few toes in the game.

Clearly with a long term investment horizon the money market fund, for me, is only transitory but I'm likely to stay in it for a good few months yet.

LHW99

I am aiming to build around 2 year's withdrawals equivalent in the Royal London fund, so that if planned natural yield falls short (2nd pandemic anyone?) that can be drawn on to make up, rather than selling equities.

NedS

Donewithwork1 said:

My question is, how do STMM funds work? How is the interest paid? How best to monitor the returns?  What sort of timeframe realistically can I leave monies in there for?  I am aware that returns will not be as good as being invested in traditional equities/bonds, but even at a 3.5% return it will not be eating into my pot in drawdown

Short Term MMFs, as with most funds, come in two variants - accumulation and income.

The accumulation fund simply increases in value each day by the equivalent of 1 day's interest, so you can track returns over the period you hold the fund by watching it's value rise. This is simplest if you do not require the interest to be paid out as it avoids reinvestment every month.

The Income variant will pay out the interest every month. The value of the fund will zig-zag up and down around on a monthly basis, as the value of the fund will increase slightly each day and then drop at the end of each month by the amount of the dividend paid. An Income fund is probably better if you require the monthly income.

These funds are designed to track SONIA, the overnight inter-bank lending rate. This is broadly equivalent to BoE base rate, currently 5.25%. Keep in mind you will pay an annual platform fee of somewhere between 0.2-0.45% depending on the platform which will eat into overall returns. As BoE base rates begin to fall, so will the rate of return of short term MMFs. Interest rates are predicted to fall later this year at maybe 0.25% for each cut. Even with 3 cuts, rates are still likely to be around 4.5% in 12 months time - after that is anyone's guess.

As these hold short term investments designed to track base rates, you really need to look at their performance over a similarly short term period. Where interest rates have risen over the last 12 months, so have the returns on these funds. Best to look back at the last 3-6 month's performance and pro-rata that over the year, as this will be a more accurate reflation than looking back 12 months ago where interest rates were lower (4.25%). Interest rates have remained unchanged for the last 8 months, so looking back at past performance over the last 3-6 months should give an accurate reflection of current expected returns.

It would not be unreasonable to keep a 1-3 year cash buffer in a short term MMF, especially at current rates. As long as the rate you are getting is matching inflation, they are serving the purpose of keeping your cash safe and available whilst retaining it's current value.

Donewithwork1

Secret2ndAccount said:

If you choose the Acc (accumulating) version of the Royal London Fund, the price will creep up a little bit every day. There is no ex-dividend date. You can hold for a long time or sell any day, and receive a value equivalent to your principal plus interest. The rate is slightly below the base rate so you should currently be looking at >5%.
It's perhaps not as safe as a bank account, but I know of no instance of one of these funds failing to pay out.
You can cash in just as much as you want to pay yourself at any point in time. Weigh up your platform's charge for selling versus the interest you lose if you take out a bigger chunk and leave it as cash in your SIPP.

Thanks that's helpful. Yes i'm looking at the 'acc' one as I'm not bothered about regular income from it.

Donewithwork1

NedS said:

Donewithwork1 said:

My question is, how do STMM funds work? How is the interest paid? How best to monitor the returns?  What sort of timeframe realistically can I leave monies in there for?  I am aware that returns will not be as good as being invested in traditional equities/bonds, but even at a 3.5% return it will not be eating into my pot in drawdown

Short Term MMFs, as with most funds, come in two variants - accumulation and income.

The accumulation fund simply increases in value each day by the equivalent of 1 day's interest, so you can track returns over the period you hold the fund by watching it's value rise. This is simplest if you do not require the interest to be paid out as it avoids reinvestment every month.

The Income variant will pay out the interest every month. The value of the fund will zig-zag up and down around on a monthly basis, as the value of the fund will increase slightly each day and then drop at the end of each month by the amount of the dividend paid. An Income fund is probably better if you require the monthly income.

These funds are designed to track SONIA, the overnight inter-bank lending rate. This is broadly equivalent to BoE base rate, currently 5.25%. Keep in mind you will pay an annual platform fee of somewhere between 0.2-0.45% depending on the platform which will eat into overall returns. As BoE base rates begin to fall, so will the rate of return of short term MMFs. Interest rates are predicted to fall later this year at maybe 0.25% for each cut. Even with 3 cuts, rates are still likely to be around 4.5% in 12 months time - after that is anyone's guess.

As these hold short term investments designed to track base rates, you really need to look at their performance over a similarly short term period. Where interest rates have risen over the last 12 months, so have the returns on these funds. Best to look back at the last 3-6 month's performance and pro-rata that over the year, as this will be a more accurate reflation than looking back 12 months ago where interest rates were lower (4.25%). Interest rates have remained unchanged for the last 8 months, so looking back at past performance over the last 3-6 months should give an accurate reflection of current expected returns.

It would not be unreasonable to keep a 1-3 year cash buffer in a short term MMF, especially at current rates. As long as the rate you are getting is matching inflation, they are serving the purpose of keeping your cash safe and available whilst retaining it's current value.

Thank you NedS for the comprehensive reply, I now have a better understanding as reading 'blurb' through googling wasn't sinking in :-)

Donewithwork1

Sunnylifeover50plan said:

I have a relatively large amount (for me) in the Vanguard Sterling Short-Term Money Market Fund (VASSTAI)
 - I have it for short term stability in an effort to reduce the risk of volatility while I decide what to do as I approach 55 in a couple of months. I didn't go for the Royal London product mainly because of the frequency of the dividend payment.

The Vanguard fund pays out each month into my SIPP and it's therefore very easy to track the returns.

Downside is spending time out of the market, limiting potential returns and running an inflation risk, but those are risks I chose to accept given my current investment objective. I still hold an equity/ bond fund which keeps a few toes in the game.

Clearly with a long term investment horizon the money market fund, for me, is only transitory but I'm likely to stay in it for a good few months yet.

Completely agree sunnylife about time out of market, and like you am trying to decide what to invest in and when! 

I'm not particularly risk averse, as apart from wanting to drawdown for the next 4.5 years to use up my tax allowance until SP age we can manage without dipping into my pension pot at all, so I guess we are quite fortunate.  By the same token, i don't want to be reckless and plunge into something without at least some careful thought and consideration.  I keep reading about predictions of an imminent market crash but sadly no-one has that crystal ball :-(

I guess an easy decision for me would be for a 50% market crash to happen today and then tomorrow I could buy into the market lol.

LHW99

The Income variant will pay out the interest every month. The value of the fund will zig-zag up and down around on a monthly basis, as the value of the fund will increase slightly each day and then drop at the end of each month by the amount of the dividend paid. An Income fund is probably better if you require the monthly income.

Although I have the RL STMMF Y income (GB00B3P2RZ52) which pays out half-yearly rather than monthly.