Welcome to our June edition of ‘Insight’ by Insignis. Each month, we discuss a topic of interest within the UK financial sector. This month, we are looking at cash within a pension.
At various stages in the life cycle of a pension, there will be a cash position within the respective pension wrap. This may be part of a decumulation strategy, the sales proceeds of a commercial property in a SSAS, or uninvested assets within a SIPP. Cash should be seen as an investment and this cash position, if not managed properly and diversified appropriately, can damage portfolio returns and present concentration and counterparty risk for your client.
At the industry level, this process is not as sophisticated as it should be and overall, managing cash for pension assets has not been easy for the industry due to limited products and the FCA classifying bank deposits longer than 30 days as non-standard assets in a SIPP.
Cash held within a SIPP must stay within the wrap to ensure that it remains intact so that the tax position is unaffected. Some pension administrators
allow clients to make direct deposits in banks to aid diversification, while
others may offer a nominal return on cash held within the pension.
SIPP cash is eligible for FSCS protection up to £85,000. It is critical to cross reference this with personal cash held with banks outside the SIPP environment.
For cash residing within a SSAS, the FSCS protection eligibility is more complex depending on the percentage ownership of each member of the scheme. For example, a scheme with 4 members, each with 25% ownership could place £340,000 in each bank and be fully covered. In the eyes of the FSCS, cash held within a SSAS is viewed as being held in Trust and so considered as separate to personal cash held within the same institution. Therefore, any personal deposits eligible for protection are unlikely to be adversely affected by the placement of SSAS cash with a bank that a SSAS Trustee already holds their cash with.
A cash position resulting from a drawdown becomes a normal retail cash deposit that will benefit from the eligibility for up to £85,000 of protection per institution from the FSCS, or £170,000 if it is placed in a joint account.
The risk is simply where any deposit in any bank, or Pension company for a single depositor exceeds £85,000, and that the appropriate checks are in place for FSCS eligibility. The solution is multiple bank accounts at under £85,000 per bank. In terms of return, the highest yielding 1 and 2-year deposits are paying 1%+ and the 2-year Gilt currently yields 0.08%. Given the long-term nature of the investment, this difference will materially affect the pension outcome.
To summarise, at certain stages of the pension lifecycle, there will be a material portion of your clients’ pension assets in cash. Whenever or however this materialises, the use of a cash platform to access multiple banks via a single interface presents an opportunity to have that cash properly placed to reduce risk and enhance return.
If you would like to discuss any aspect of this ‘Insight’ in more detail, then please get in touch with us at info@insigniscash.com.