The role of cash in SIPPs as interest rates rise – read an expert opinion

Over the last six months or so, one of the main questions we have received from both advisers and clients has been: what banks offer accounts for SIPPs, and where can we achieve higher interest rates?

The Bank of England (BoE) have been gradually increasing interest rates since the end of 2021, from the historic lows when the bank rate dipped below 1% for the first time in 2009 to the level of 4% as of February 2023.

While these rate rises haven’t been great news for those with tracker mortgages or a fixed-rate deal that is due to expire, people who are risk-averse and wish to hold cash have finally seen the return of banks offering attractive rates of interest.

With the Financial Services Compensation Scheme (FSCS) limit being set at £85,000, those clients who wish to ensure that the monies were covered in the event of a bank failing would often split their SIPP monies amongst various institutions, with balances not exceeding this amount.

This makes sense, as typically the FSCS looks through the SIPP provider to the underlying beneficiary should a bank fail and cover the deposit, subject to the client not having personal monies that exceed £85,000 with the same institution. The FSCS website has more useful information about this.

As a bespoke provider, we are used to seeing clients holding sums of cash as part of their SIPP investment strategy. While some use the trustee bank account for this purpose (details of the interest rate available can be found here), others look elsewhere for higher returns.

As we levy a flat annual administration fee with no charges for additional bank accounts within the SIPP, we understand why clients wanting to use multiple bank accounts would approach us. Indeed, we once had a client with 12 different bank accounts in his SIPP with balances all under the FSCS limit!

Find out more about the investment flexibility the IPM SIPP offers in this useful explainer.

Where to hold SIPP monies?

IPM does not operate a panel of banks clients must select from if they want to hold cash outside the trustee bank account.

Historically, banks have offered accounts directly to SIPP providers. Some banks offered specialist SIPP or SSAS products, while some had teams that specifically looked after SIPP providers and advisers/clients looking to make deposits using SIPP monies.

National Savings & Investments (NS&I) products have also been popular for SIPP savers in the past, down to a combination of the interest rates offered and a higher level of protection.

This did take a wobble in 2020, as NS&I restricted their products for SIPP savers. However, NS&I have recently launched new products for SIPPs, which we are receiving enquiries about.

A few years ago, we saw a number of banks stop offering deposit accounts directly to SIPP providers. The feedback we received from the banks was that this was not a profitable area for them as SIPP accounts were labour-intensive.

This saw client options narrow and today there are fewer banks offering accounts directly to SIPP providers. Investment Sense provide a useful guide to which banks do still offer this service and the accounts that are available.

It was around the time of the first lockdown that we saw the development of cash management solutions. Similar to traditional platforms, these services enable clients to place monies on deposit with various banks all in one place.

We work with a number of these firms on their SIPP offering as we saw these solutions as having several advantages, both for SIPP clients and IPM:

• Clients are able to see their deposits with various banks online
• Clients are able to manage any maturing deposits or give notice directly through the platform
• Instead of having multiple paper applications with different banks for those clients who wish to keep balances below the FSCS limit, the SIPP has one account with the cash management firm. We wish these solutions were around for the client who had 12 different accounts with different banks!

We can work with any cash management solution subject to our own internal assessments being completed.

One such firm that provides this service is Insignis Cash Solutions. Given the interest we see in holding cash in SIPPs, we asked Giles Hutson, the CEO of Insignis Cash Solutions, to give his opinion on the role of cash in SIPPs at the moment, how a cash management solution can work within a bespoke SIPP like IPM’s, and what the future of this service looks like.

Capitalising on a rising interest rate environment

On 2 February 2023, the BoE raised the base rate again. It’s now running at 4%. As market conditions change, it’s not difficult to find instant access accounts that pay over 3% a year and fixed-term accounts that pay more than this.

The drivers for holding cash don’t really change much over the years. Cash really comes to exist in a SIPP portfolio for four reasons:

1. To ensure there is sufficient liquidity in the SIPP
2. As a conscious part of an investment strategy – diversification or risk-aversion
3. Part of a decumulation strategy
4. Failure to do something about it.

In all cases (even the last of these), the default cash in a SIPP has at least likely provided capital protection with no material loss in real terms due to inflation. Today, that dynamic has changed.

Real loss is occurring for customers who don’t shop around and, with cash management solutions, there’s no arguing that the cost of doing something is too great.

Addressing the challenge – a streamlined solution

Until the second half of last year, we at Insignis Cash Solutions saw a steady flow of new money from SIPPs.

Since the start of this new interest rate environment, we’ve seen a major pick-up of advisers taking advantage of a simple onboarding process to place their clients’ cash in a service that reduces risk and increases return.

And it’s not simply the onboarding service that we have streamlined (with documents pre-agreed with SIPPs, for example).

We also make it easy to place cash into new accounts when fixed-term arrangements come to an end. There’s no need for a whole load of new forms. Because your clients’ cash is held in a cash management service, we’ll nudge when the term comes to an end and simply place the cash into a new account at your direction.

On top of that, we help advisers by making sure that we have a robust range of banks – a range that facilitates diversification across banking institutions. We have 40 banks and building societies providing solutions on the Insignis cash management platform.

And what of the future?

Market volatility and high inflation means that managing your clients’ cash will likely be on your to-do list. However, researching and comparing different banking institutions can feel cumbersome or overwhelming.

In addition, many of us may have concerns over unknown institutions and worry that, in the event of a collapse, they may take our savings with them.

Banks and building societies are having the same thoughts. More and more of them are concluding that they want to be offering competitive savings rates. So, we continue to work with new institutions who want to come onto our platform.

As well as lesser-known institutions, we have the big banks including Barclays, Santander, and HSBC signed up to our platform. These are all big names that will give your clients confidence.

We will continue to strive to make sure strong banks paying competitive rates are simply and easily available through the Insignis cash management platform. Dealing with cash this way removes the hassle of constantly monitoring the cash savings environment, moving funds, and opening new accounts.

FSCS protection applies

With thousands of different savings products available on cash management platforms, the service also allows clients to manage their funds based on their liquidity requirements. It also aids financial planning as funds can be spread across savings products ranging from easy access to five years.

With cash management platforms like Insignis Cash Solutions the client always maintains beneficial ownership of the funds.

All the UK-based institutions that Insignis Cash Solutions works with are authorised by the PRA and regulated by the FCA and so offer protection under the FSCS. This protects eligible deposits up to £85,000 per depositor, per institution.

This enables clients to spread their cash across various banks or building societies within the Insignis Cash Solutions service while maximising FSCS protection eligibility.

Get in touch

If you want to explore how a cash management solution might work for your client, or your client is looking to hold more cash within their SIPP, please get in touch.

Email info@ipm-pensions.co.uk or call 01438 747151.