Sipp fraud is costing cautious and sensible pension investors thousands of pounds a year. These are people who would never trust even a reputable investment firm with a penny of their hard-earned retirement cash.
And they would never be fooled by the charlatans and downright thieves who have fleeced many a saver out of their pensions savings.
But strict rules introduced to frustrate such frauds are preventing them getting a guaranteed 6.2% return on their pension fund.
Instead, they are confined to 3.65%, a potential loss of £25,500 a year for those lucky enough to have a million-pound fund they want to keep safe but grow well above the yield of a FTSE tracker or a gilt fund. And with none of the risks or costs.
These rates are not just table topping, they are table smashing
Investment funds that track stock market indices are the best place for money invested over 20 years or more. But for shorter periods, properly managed cash, moved annually to best buys, can outpace them.
At the moment, of course, cash is king. National Savings & Investments (NS&I) recently launched its Capital Income and Capital Growth Bonds, both paying 6.2% AER to UK residents who can tie their money up for a year and invest online.
Amounts from £500 to £1m are welcome in each and guaranteed by the Treasury. No £85,000 compensation limit here.
These rates are not just table topping, they are table smashing. The closest rivals – and subject to the £85,000 safety limit for compensation – pay around 6%. The return on the bonds is taxable as income but, of course, that does not worry an investment in a pension fund which accrues interest tax-free.
Most will know of the Hartley Pensions case, which saw clients left with very little of the £2.3bn they had invested in their Sipps
Except it can’t. Sipps can be put in the regular instant access NS&I Income Bonds, but they pay only 3.65%. A full 2.55% less than the one-year bonds.
But most Sipp administrators refuse to allow any term deposits in a Sipp because they are classed as non-standard investments. And for every client who has non-standard investments, the Financial Conduct Authority rules make them hold more capital.
A standard cash ‘investment’ is one that can be realised within 30 days. So, easy access accounts count as standard. But anything longer term is non-standard. That rule was introduced in September 2016 partly to forestall charlatans offering unrealistic returns and investing in illiquid or dangerous assets.
Despite it, misselling of Sipp investments is still a real danger. Most will know of the Hartley Pensions case, which saw clients left with very little of the £2.3bn they had invested in their Sipps. Such schemes promise good returns but on investments that inevitably fail, such as storage pods in the North of England.
Someone with £1m will get £62,000 after a year and their original million returned in full
The madness is that there cannot be a safer place for Sipp money than NS&I. It has a limitless guarantee from the Treasury. Unlike the scammers, if it promises a 6.2% return over one year then you will get your money back in 12 months, boosted by 6.2%. Someone with £1m will get £62,000 after a year and their original million returned in full.
But Sipp providers are forced to hold extra capital for such an investment as if it was in Brazilian teak forests and that costs too much for many.
The owner of one small Sipp administrator who wanted to remain anonymous and has a number of clients with cash Sipps, told me: “I don’t think the FCA set out to cause this problem. It is an unintended consequence. But it is Illogical because NS&I bonds are completely safe and cannot go wrong.”
And IFA Mark Meldon, eponymous boss of Meldon and Co, said: “There ought to be a waiver for National Savings products because they fulfil an important social function as a cheap way of raising money for the government. It is stupid and crass to class riskless investments as non-standard investments.”
It is stupid and crass to class riskless investments as non-standard investments
It is sad to see the FCA joining in the bias against cash which permeates every corner of the regulated financial world. I wrote in Money Marketing before that the 2022 Barclays Equity Gilt Study was flawed because it exaggerated the return on investments by calculating them using index movements and ignoring the charges and costs of real world investing.
It also understated the return on cash by using the dreadful Nationwide Invest Direct Account. The 2023 study continues these errors. It uses the lowest rate paid on that account in December 2022 of 0.75% while the best buy one-year bonds that month paid 4.36%.
Even a best buy easy access account paid 3%, four times the rate the study used. It loads the dice in both directions, so cash inevitably seems a poor option to advisers who rely on it.
Given the regulator’s usual glacial pace, something might happen in, what, 2026?
For the people eccentric enough to want a capital not-at-risk investment with a high guaranteed return, investing a Sipp in cash can be difficult anyway. Many Sipp administrators, including the larger ones, simply won’t allow it. And even those which will are hit by the FCA capital rules which make it too expensive to allow best buys which cannot be cashed inside 30 days.
But there may just be light at the end of this dark tunnel. Asked for a comment on this problem, the FCA said: “We are aware of the issues, take the concerns seriously and are considering next steps.” Given the regulator’s usual glacial pace, something might happen in, what, 2026?
Paul Lewis is a financial journalist and host of Radio 4’s Money Box
Hi Paul
We use the Transact platform. Cash within clients SIPP account pays 4.62% (no skimming from Transact). They also offer Fixed Term Deposits via several regulated UK banks, at the press of a button. 1 Year Fixed Terms are currently 5.75% (they were a little higher but rates have just come down a bit).
Transact allow IFAs to charge different fees between Cash & investment assets, which can help maintain a high level of Cash return if the IFA considers Cash an easier asset class to manage. Using Cash within pension portfolios – instead of arguing against them – is a pragmatic and sensible investment approach, but an IFA has to have the tools to use them.
So, whilst I cannot use the NS&I one year bond, as you say, I can still get clients a very good Cash return in their pensions, just by using a good Platform. If your pension provider cannot do this, the problem may be your choice of platform, rather than the laws.
One caveat: Transact term deposits cannot be held in a GIA within a SIPP, only for individual or joint portfolios.
Ah ….. vanilla ain’t the same as it used to be ?
Likewise, asking for a cup of coffee, is greeted with a slightly quizzical side glance, and a snort of derision !! followed by a 400% mark up !!
Why is that Paul ? Why ?
Another good reason for having a SSAS – they are not affected by these restrictions and can access the 6.2% rate.
“[Mark Meldon] There ought to be a waiver for National Savings products because they fulfil an important social function as a cheap way of raising money for the government.”
NS&I products are not a cheap way for the Government to raise money. It costs between half and two-thirds of that rate for the Government to borrow money via gilts. They are an expensive way for the Government to buy votes.
For once I sympathise with Lewis’ argument, but I don’t think the FCA is going to bother changing the rules. Some NS&I products aren’t even available to SIPPs (though the Guaranteed Growth bond is, in theory). Despite Lewis’ continued claims that investments are rubbish and holding cash is a “no-brainer” (article of 18 January 2023), most pensions should be invested, except for money needed in the short-term which usually needs to be on easy-access. The number of people who want to tie up SIPP cash for exactly one year is very limited. They exist (lower risk investors, people who have cash they know they want to withdraw next year but not this one), but they aren’t enough to lobby the FCA. And as Christopher Petrie points out above they can use term deposits.
You are the ultimate broken record! Abraham Okusanya has repeatedly explained to you in the past that comparing your ‘Active Cash’ strategy solely against the scolioric UK Index is farcical. Advised clients invariably have globally diversified portfolios so go and compare your active cash to the FTSE World Index, (with dividends reinvested of course) – then when you get back we can have a grown-up conversation.
(I would also point out that with 6.2% interest you are still only effectively standing still in real terms – but I know from the previous attempts of others this too will go completely over your head).
Paul seems to have touched some nerves here…. I guess money market rates at around 5-6% written on an exchange contract, aka AAA rated, would be a good bet for a while/nearing encashment etc. Quite why deposit accounts are deemed non risk is beyond reason, why, you cannot even sell the risk as you could with a CD or note or similar.
Without a third party contribution, most self contributory pensions are, in comparison to other products available, a waste of money, as well as being so vulnerable to political and greedy influences and influencers…
That the HP Sauce pension scheme, closely followed by local govt. ones, is about the most generous around (in UK), is a testament to the ever remote and ladder raising views of politicians towards the public.
Better to find a gross product, even without source tax relief, which give you total control, and as much CHOICE as possible in terms dates, investment options and amounts, and encashment dates. After virtually all else has been destroyed by successive Govts. in retail terms, pensions remain the last, big, scrummy target for political aims.
Thankfully, saving lives still, yet, trumps tax take for this Govt. That said, I am sure if they could have restricted the recent fund limit removal to health they would have done.
P>S> Diverging.. Sorry, but I know a bit about Brum’s situation… why has no one, seemingly, asked why the Council’s accounts have been qualified, (not signed off by the auditors), for the last three consecutive years? Doubtless, whatever is cut, the THEIR FS Scheme will bravely endure… bless…
I get what Paul Lewis is saying and it’s a valid point. However, even if you are receiving 6.2% on cash, the current CPI rate is 6.8% meaning that the real rate of return is -0.6%.
Paul is a journalist and not a qualified adviser.
Like Premium Bonds, cash rates are eaten up by inflation