Investec Specialist Private Bank Reports: Cash - A SIPP's best friend
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Investec reports that demand for wrappers, such as Self Invested Personal Pensions & Small Self- Administered Schemes, is continuing to rise with some industry experts estimating that in three years' time one million plans will have been sold.
- (1888PressRelease) June 04, 2011 - Cash: A SIPP's best friend
By: Lionel Ross, Investec Bank
Demand for wrappers, such as Self Invested Personal Pensions (SIPPs) and Small Self- Administered Schemes (SSAS), is continuing to rise with some industry experts estimating that in three years' time one million SIPP plans will have been sold. Indeed, in the 12 months to November 2010, a third (36%) of IFAs1 saw an increase in demand for SIPPs, with growth driven in part by a desire for greater control over pension planning.
Following the changes to the retirement age, which came into force on 5th April 2011, there is now a wider realisation in the UK that we can no longer rely on the state and must take responsibility for our own finances in retirement. Likewise, the fact that individuals are no longer required to purchase an annuity at 75 means that pension assets can remain invested for a significantly longer period of time, perhaps twenty-five to thirty years. As a result, more people will look at SIPPs as they contract out of the state-backed top-up scheme and seek greater control of their pension assets
While SIPPs are often lauded for their ability to expose investors to diverse investment opportunities, it is sometimes forgotten that they are also a repository for large amounts of cash.
However, in recent months investors have had to make tough decisions with regards to the proportion of cash they hold in their portfolios. On the one hand, cash addresses the requirement for those with a lower appetite to risk; while on the other hand, returns paid on cash deposits are negligible, due partly to the base rate remaining at an historic low for over two years.
Our analysis shows that the average return clients receive on their cash deposits in their SIPP or SSAS wrapper is 1.33%, but that almost one in five (19%) receive just 0.5% or less1. Meanwhile, 71% of pension-focused IFAs believe that the rate of return that their clients receive on the cash element of their pension investments is unacceptably low. These findings highlight the need for greater transparency to enable investors and their advisers to make more informed decisions when selecting a SIPP or SSAS in order to maximise returns.
So what does this mean for SIPP investors and where should they go? Typically the cash element of a SIPP includes money resulting from the transfer of funds into the SIPP from other schemes, lump sums being invested or cash to meet income drawdown requirements. In some cases, investors could have a significant amount of cash held in their SIPP at any given time. Despite low returns, it appears that the banking crisis has left a legacy in that many investors still have a low threshold to risk and are keen to retain a relatively high proportion of cash in their portfolios.
For instance, a survey we conducted with IFAs1 revealed that a quarter of their clients have between £100,001 and £250,000 in cash deposits and a further 10% have between £250,001 and £500,000 held in cash. So should these investors reduce the amount of cash they are holding if they are getting such paltry returns? The simple answer is no. Cash will also be an important component in a balanced portfolio, no matter what returns this asset class is generating, particularly for those nearing retirement who may not be willing to risk any more of their retirement income.
Recent changes to government legislation and the desire for greater control over pension assets notwithstanding, technology is going to play a key role in the future growth of SIPPs. Indeed, despite the increased demand for SIPPs, 60% of IFAs2 believe that many platforms provide a limited range of cash deposit products. Almost three quarters of IFA surveyed would recommend to their clients that they increase their cash allocation if there was a greater choice of products available. Typically these IFAs have up to 10% of their clients' assets in cash, although a fifth have between 11% to 30% and 5% have over half their clients' wrapped assets in cash.
As the SIPP market becomes more competitive and, as the base rate starts to increase, providers should be looking to offer more attractive returns on cash as a way of differentiating their proposition and growing their client base. As it grows, the SIPP market is likely to come under greater scrutiny and investors will become more discerning when considering an investment platform.
So despite current low rates of return, cash is here to stay and will continue to be a core part of SIPP portfolios. The most important thing for investors and their advisers to do, is to ensure that their cash is invested in accounts paying consistently fair rates if clients are to be kept satisfied.
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