How can I hold cash in my pension and ISAs?
|Investment | Unit Trusts
Asked by shetland, submitted
20 May 2013.
I am concerned that the market is becoming overheated and think we are due a correction.
Most of my investments are held in an ISA wrapper or a self select drawdown SIPP. I obviously don't want to remove my investments from the ISA and can't remove them from my SIPP. Are there unit trusts which invest in deposit accounts so that the capital is not at risk?
And, if so, is it possible to hold these in an ISA or SIPP? I do not want to invest in corporate bonds or gilts as I believe these are equally at risk as equities.
Answered by Justin on 28 June 2013
In the time it's taken me to answer your question (sorry) your fears have become partially founded..
The safest asset you can hold in your pension is cash, effectively a bank account linked to the SIPP. The downside, is that low cost SIPP providers pay next to no interest on such accounts, they make a tidy sum by pocketing the margin (between what the bank pays and what you receive) themselves,
You can usually earn a bit more using 'money market' or 'liquidity' funds. These typically buy bits of paper from other financial institutions promising returns - which is good unless the promises turn out to be hollow, in which case you could lose money (as happened to some of these funds during the credit crunch).
Otherwise, if you have a more expensive 'full' SIPP you can probably use a savings account of your choice, provided it allows pension investment (look for 'trustee' accounts). Rates will still be low (1-2%) in the current environment, but significantly higher than usually paid on low cost SIPPs. However, higher SIPP charges may well erode the difference.
It's rather harder in a shares ISA as you're only allowed to hold cash if you intend to invest it, plus any interest is taxed at 20%. But doing so for a few months is unlikely to cause a problem and is quite feasible if you use a platform, just be prepared to receive pretty much zero interest.
Money market funds are also normally prohibited by the '5% test', that is HMRC does not allow investments to be held in a shares ISA if they guarantee (or the nature of the investment is such) that any loss will not exceed 5% at any time in the next 5 years.
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