Interactive Investor

Holding cash in a SIPP


Can I hold cash in my SIPP?

Self-invested personal pensions (SIPPs) offer investment freedom, enabling you to choose where and how your pension savings are invested. As well as giving you access to a wide range of investments, including funds, shares and, on some SIPPs, even commercial property, you can also hold one of the simplest assets – cash.

Reasons you might hold cash in a SIPP

Cash may sound a strange choice if you picked a SIPP for its investment freedom, but there are several reasons why you might hold cash in a SIPP.

Secure asset

Cash is a secure asset. Returns will never be spectacular but they’ll always be predictable. This is particularly reassuring during periods when stock markets are falling. It also works well if you have started drawing an income from your SIPP and you want to protect your next withdrawals from any market volatility.

But, this security and predictability of cash and other cash-like investments such as deposit accounts and money-market funds does come with a major drawback. Cash-like investments often grow at a rate lower than the rate of inflation. This means the real value – or spending power – of your cash and cash-like investments can fall.

Increased liquidity

Holding cash can support your broader investment strategy. If you identify an investment opportunity, having cash on standby makes it easy to take advantage of it. Without this liquidity, you would have to consider transferring out of another investment or waiting until you made another contribution to your SIPP.

Taking gains

There are also times when you might need to hold cash. If some of your investments have performed well, you might want to realise your profits by selling the gain you have made. This protects your gain from any future volatility but also helps you to maintain asset allocation across your SIPP portfolio.

Being able to hold your profits in cash also gives you time to decide where you would like to invest next.

Tax relief on contributions

You also receive tax relief on any contributions paid into your SIPP. For every £80 you pay in, the government will top it up with an additional £20. Higher rate taxpayers can claim a further 20% tax relief through their self-assessment tax return, and additional rate taxpayers an extra 25%.

What are the disadvantages of holding cash within a SIPP?

Cash can provide valuable security and liquidity to complement your SIPP investment strategy but it has its drawbacks as a pension asset.

Interest rates on cash accounts are low so, if you hold a significant part of your SIPP in this asset, you could find that its value fails to keep up with inflation.

The longer you’re invested in cash and cash-like assets, the greater the risk inflation will reduce the real value of your investments.

The Consumer Prices Index tracks the rate the value of goods and services increases over time. The 12-month rate for December 2021, including owner occupiers’ housing costs, was 4.8%. If inflation continues at this rate, £10,000 would only be worth the equivalent of £7,810 in five years’ time.

To ensure your money retains or its spending power, it needs to grow at the same rate as inflation. Although stock market performance is volatile, over the longer term it is more likely to deliver the inflation-beating returns that will give you the retirement you want.

Our Real Returns Ready Reckoner takes a look at the real returns of a variety of assets, savings and investment products after inflation. 

Find out more about ii’s SIPP cash account.

Getting financial advice

If you are unsure about your SIPP choices, it is worth seeking professional financial advice. An independent financial adviser will be able to assess your circumstances and recommend the most appropriate action to achieve your goals.

If you are over 50, you can get free and impartial pensions guidance from Pension Wise. This is a government service designed to help people understand their pension options.

How can Pension Wise help?

If you have a defined contribution pension scheme and are 50 or over, then you can access free, impartial guidance on your pension options by booking a face to face or telephone appointment with Pension Wise, a service from MoneyHelper

If you are under 50, you can still access free, impartial help and information about your pensions from MoneyHelper

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Please remember, SIPPs are aimed at people happy to make their own investment decisions. Investment value can go up or down and you could get back less than you invest. You can normally only access the money from age 55 (57 from 2028). We recommend seeking advice from a suitably qualified financial advisor before making any decisions. Pension and tax rules depend on your circumstances and may change in future.