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Use of cash may be in decline but it still has an important part to play in financial planning, not least in SIPPS, says Damien Bowler, pensions technical manager, Curtis Banks.
The FCA believe that the consumer investment market is worth around £1.6 trillion, this includes money invested through over 6,000 wealth managers, advisers and investment platforms. But in recent years they have been concerned about the amount that is held in cash savings. They have estimated that 8.6 million consumers hold more than £10,000 of investible assets in cash. This provides advisers with an opportunity to grow their client bases and also help consumers get better returns with their savings, investments and pensions.
It is fair to say that technology has played a huge part in changing the financial services sector. Who would have thought 10 years ago that you would have been able to pay for shopping or to travel using your watch, it is quite extraordinary how things have changed. Despite the decline in the importance of cash in society and everyday life, cash does still have an important part to play in financial planning.
The starting point for an adviser, with his client, when looking at cash investments has to be inflation. In January of this year, annual inflation was just over 10% and the Bank of England has been trying to contain this and in fact reduce it. The knock on effect has been a steep rise in interest rates, meaning that clients can now benefit where borrowers have for the last decade. This has meant that there is more interest in having a proportion of investments within a low risk portfolio in some form of cash investment.
So what options are available when looking at cash options for clients:
- Fixed term bank accounts (FTBAs)
- Notice accounts
- Cash platform
- NS&I products (SIPP compatible)
- Foreign currency.
Fixed term bank accounts
Offered by a wide variety of banks and building societies, fixed term bank accounts offer a fixed rate of interest. They can range from a month up to 5 years. Interest is generally paid at maturity and the client will be tied in for the full term, although there are some accounts that pay interest monthly and these will be useful for those that are looking to take regular income from their SIPP. Rates will vary from provider, but generally improve the longer the funds are locked in. It is worth noting that qualifying investment amounts differ between providers.
A fixed term bank account can be a great option for investing cash in a secure manor and flexible in term lengths to be tailored to your client’s needs. FTBAs can be perfect to match maturity to coincide with income withdrawals, whilst removing risk to the capital which other investments could present.
Notice accounts
Offered by a variety of banks and building societies, notice accounts vary in length, for example 30, 60 and 90 day notice periods. The interest amounts are variable with access to withdrawals subject to the relevant notice period and generally rates are higher for longer notice periods. Qualifying investment amounts can vary, but are generally less than fixed term accounts with some having no minimum deposit amount.
Notice accounts offer a great opportunity to achieve a better rate of interest then main SIPP cash account whilst providing greater flexibility then a FTBA. Notice accounts could potentially complement FTBAs for clients wanting regular monthly/yearly withdrawals as well as requiring access to emergency funds at shorter notice then provided by FTBAs.
Cash platforms
These are very much like an investment platform but designed for cash holdings. The platform is a hub with access to a variety of savings accounts from a wide range of banks and building societies. This function removes the manual research, whilst helping to manage and simplify the associated management of the chosen accounts, even providing maturity reminders to avoid any unwanted reinvestment.
Funds can be transferred from the main SIPP cash account into the hub where all further dealings will take place. There will be access to fixed, notice and instant access accounts as well as foreign currency account denominated in Euros, US Dollar and Sterling.
An important point is to ensure that the financial institution that holds the cash investment is covered by the Financial Services Compensation Scheme up to £85,000, and that the client doesn’t already have savings with them.
Now is as good a time as any to consider cash again in your clients SIPP, regardless of whether it’s for diversification, security or to complement a decumulation strategy. Cash can now work harder than at anytime in the last 15 years whilst providing that peace of mind and flexibility to work around your clients needs.
