Where to hold SIPP cash buffer?

[MDW1954]

The bulk of my retirement income will come from several brokerage accounts, mostly SIPPs and ISAs.

I'm 68, shortly to be 69, and although I'm winding down, anticipate working for several more years yet. The commute to work is a short walk up the stairs into the attic, and as the work keeps arriving, it seems rude to turn it away. I set my own hours, and it couldn't be any easier.

Even so, I have crystallised my primary SIPP, and have been building up a one-year cash buffer in that and my primary ISA. No money has been withdrawn from the SIPP, beyond the 25% allowance (in order to sidestep the dreaded MPAA, now thankfully re-set to £10K), and what has been withdrawn has been reinvested in an ISA.

The question: what to do with a cash buffer, which (when fully established) will reach about £25K?

Holding it as cash doesn't seem smart, and just exposes it to PPP erosion. Investing in "safe" stocks? They still go down in a crash.

Current thinking: money market funds, and gilts. Neither of which I know very much about, or have ever invested in.

What do other people do?

MDW1954

[Urbandreamer]

I recently retired, so will be dependent upon pensions and ISA savings.

Currently I believe that I have about 6 months in cash and regard that as more than I feel comfortable with. I intend however keeping that level to reduce effort.

Alternatives to equities? Well I currently have 4% in Ruffer (who do the work of finding alternatives for me), 2% in a corporate bond fund and 1% in a property fund. Ignoring the 3% in Civitas.

Have you considered gold as an option? Obviously it would have to be a ETF to comply with SIPP or ISA rules. I don't currently own any but am considering it. I'm also considering increasing my bitcoin holding from 0.25%, possibly to as much as 1%.

[xxd09]

Cash buffer should be by definition instantly accessible
I use a high interest bank account currently paying 3.3% -can keep up to £28000 here and get £1000 interest tax free pa if a basic rate tax payer
Any other cash is in an instant access Cash ISA -no tax implications-allowed £20000 pa per person
Keep an eye on climbing interest rates re high interest bank account
xxd09

[richfool]

Yes, I would have thought an online savings account like Marcus 3.3%, (ISA or non-ISA), or if it has to stay in the SIPP, perhaps Ruffer (RICA) for preservation/protection. Though the SP of the latter has eased down lately.

[nmdhqbc]

my cash buffer is designed to breach the gap between what i spend and dividends i get paid. in bad years for the non-dividend paying portion of my portfolio it will be spent down. so i have projected that to be over 3.5 years in a worst case scenario i plugged into my spreadsheet. so year 1 spend down is in easy access account. year 2 in a 1 year fix, the rest in a 2 year fix. next time i need to think about it i may expand to a 3 year fix for year 2 or not. i'll decide at the time. the growth portion currently is down so i'll just be spending it down for the foreseeable future. but as always i find it hard to spend so i seem to be stretching out that 3.5 years buffer if i keep going as i am.

[MDW1954]

Yes, I would have thought an online savings account like Marcus 3.3%, (ISA or non-ISA), or if it has to stay in the SIPP, perhaps Ruffer (RICA) for preservation/protection. Though the SP of the latter has eased down lately.

Sorry, folks, maybe I should have been clearer. Like I say, I haven't taken any money out of the SIPP (beyond the 25% tax-free), and nor do I want to, as it would trigger the MPAA. Granted, £10K is better than £4K, but until I actually choose to retire, the money we're talking about has to stay inside the SIPP.

So what to do with the cash buffer, inside the SIPP?

MDW1954

[simoan]

Yes, I would have thought an online savings account like Marcus 3.3%, (ISA or non-ISA), or if it has to stay in the SIPP, perhaps Ruffer (RICA) for preservation/protection. Though the SP of the latter has eased down lately.

Sorry, folks, maybe I should have been clearer. Like I say, I haven't taken any money out of the SIPP (beyond the 25% tax-free), and nor do I want to, as it would trigger the MPAA. Granted, £10K is better than £4K, but until I actually choose to retire, the money we're talking about has to stay inside the SIPP.

So what to do with the cash buffer, inside the SIPP?

MDW1954

I'm getting 3% tax free interest on cash in my HL SIPP and so I don't have that problem. I'm happy with that as a virtually risk free holding. Anything you hold, other than cash, will have risk attached. There's no easy way around that, and what you decide to do depends on your risk tolerance. Personally, I wouldn't want to hold any instrument issued by the UK Government.

Sorry I can't be of more help.
All the best, Si

[xxd09]

SIPPs and ISAs now seem to be having worthwhile interest rates on cash held in the tax free wrapper which is a very new situation so hopefully you will be OK leaving cash well alone
xxd09

[Urbandreamer]

So what to do with the cash buffer, inside the SIPP?

MDW1954

I'm afraid that by talking a "one year" cash buffer you gave me, and I suspect others, the impression that it was for consumption over the course of one year. If the cash is to remain in the SIPP, then you are holding cash as an investment. I.E as dry powder to invest or to reduce volatility.

I don't do that and can't offer any recommendations. Personally I regard cash as a risk free loss. Interest of 3% means that you are only loosing 7% pa in real terms.

[simoan]

So what to do with the cash buffer, inside the SIPP?

MDW1954

I'm afraid that by talking a "one year" cash buffer you gave me, and I suspect others, the impression that it was for consumption over the course of one year. If the cash is to remain in the SIPP, then you are holding cash as an investment. I.E as dry powder to invest or to reduce volatility.

I don't do that and can't offer any recommendations. Personally I regard cash as a risk free loss. Interest of 3% means that you are only loosing 7% pa in real terms.

That's very short term thinking though. In reality, the interest on my cash holding has gone up about 300% in the last year. Much higher than inflation. I don't think most people understand that cash is a position in itself and a way of controlling risk at the portfolio level.

[simoan]

Yes, I would have thought an online savings account like Marcus 3.3%, (ISA or non-ISA), or if it has to stay in the SIPP, perhaps Ruffer (RICA) for preservation/protection. Though the SP of the latter has eased down lately.

Your comment reminded me to look at the performance of these so-called "preservation" trusts. They are all down in real terms over the past 12 months according to AIC website. You'd have been far better off holding cash on a risk adjusted basis. They haven't worked.

[Dod101]

The bulk of my retirement income will come from several brokerage accounts, mostly SIPPs and ISAs.

I'm 68, shortly to be 69, and although I'm winding down, anticipate working for several more years yet. The commute to work is a short walk up the stairs into the attic, and as the work keeps arriving, it seems rude to turn it away. I set my own hours, and it couldn't be any easier.

Even so, I have crystallised my primary SIPP, and have been building up a one-year cash buffer in that and my primary ISA. No money has been withdrawn from the SIPP, beyond the 25% allowance (in order to sidestep the dreaded MPAA, now thankfully re-set to £10K), and what has been withdrawn has been reinvested in an ISA.

The question: what to do with a cash buffer, which (when fully established) will reach about £25K?

Holding it as cash doesn't seem smart, and just exposes it to PPP erosion. Investing in "safe" stocks? They still go down in a crash.

Current thinking: money market funds, and gilts. Neither of which I know very much about, or have ever invested in.

What do other people do?

MDW1954

If it is intended to be a cash buffer as you say, it needs to be held in cash. Otherwise you are changing the parameters. Is it to be a cash buffer or not? If you buy say Ruffer or gilts, then it is no longer a cash buffer; it is just part of your portfolio with any/all the risks attached to that. Find the best interest rate you can and put it there. Certainly with current inflation it will lose buying power but everything costs and at least you have it at hand in nominal terms anyway.

Dod

[Wuffle]

Coincidentally I was looking at CGT yesterday (I held it briefly once before) and it did look a bit tempting again as a stabiliser. I note it has gone to a small discount from a small premium, maybe 5% of nothing but sentimentality.
In answer to the OP's question as of now, half and half of that and cash in the SIPP assuming receipt of a respectable interest from the broker would be my suggestion. Depending on the scale of the lump and the OPs inclination, maybe rebalanced ongoing.
The fundamental point of this little bundle being to plod along and be there to be spent in the event of equity volatility rather than liquidating under priced equities.

Incidentally I am often bewildered by the casual statement of '3 years spending', as though there is a fixed sum that the individual must spend each year which is not variable. Is this a reflection of a background as PAYE salary men and women who cannot conceive a variable amount of income? MDW1954 sounds to me like someone who has a variable income over the years and is well used to cutting his cloth accordingly, in which case the sum need only be of a size to cover a period of readjustment and then a sum to cover this new level of outgoing for an arbitrary period.
You know, cut the cruises out for a bit. What is left for a retired home owner? Food and bills?
If you WANT to spend the extra, ok, but don't mix that up with logic.

W.

[simoan]

Certainly with current inflation it will lose buying power but everything costs and at least you have it at hand in nominal terms anyway.

Dod

I keep seeing comments like this which are misleading and wrong. We should do better on a financial website than peddling the dumb assertions of your average tabloid journalist. Inflation is a first derivative (the change in prices) so you can only compare it with the change in interest rates. The change in interest rates on cash in the past year has far exceeded inflation and so cash has been a very good place to be on a risk adjusted basis. Even the "preservation" trusts full of index linked Gilts and US Treasuries have lost you money.

Interest rate changes may now moderate but you could easily see up to another 0.5% increase being needed to control inflation which represents a further 10% increase in interest potentially i.e. still equal to, or greater than your 10% inflation. The cost of owning equities has gone up. Why hold an equity yielding 5% when you can get that risk free in a savings account?

[MDW1954]

MDW1954 sounds to me like someone who has a variable income over the years and is well used to cutting his cloth accordingly, in which case the sum need only be of a size to cover a period of readjustment and then a sum to cover this new level of outgoing for an arbitrary period.
You know, cut the cruises out for a bit. What is left for a retired home owner? Food and bills?

W.

OK, interesting comments, folks. To clarify things again, the idea was to hold cash as an income reserve, to provide income through periods of reduced dividend payments -- recessions like 2008-2009, or the pandemic.

Wuffle's point above is spot on: it's to fund a period of adjustment, and buy some time for normal income levels to return.

MDW1954

[Dod101]

Certainly with current inflation it will lose buying power but everything costs and at least you have it at hand in nominal terms anyway.

Dod

I keep seeing comments like this which are misleading and wrong. We should do better on a financial website than peddling the dumb assertions of your average tabloid journalist. Inflation is a first derivative (the change in prices) so you can only compare it with the change in interest rates. The change in interest rates on cash in the past year has far exceeded inflation and so cash has been a very good place to be on a risk adjusted basis. Even the "preservation" trusts full of index linked Gilts and US Treasuries have lost you money.

Interest rate changes may now moderate but you could easily see up to another 0.5% increase being needed to control inflation which represents a further 10% increase in interest potentially i.e. still equal to, or greater than your 10% inflation. The cost of owning equities has gone up. Why hold an equity yielding 5% when you can get that risk free in a savings account?

Accepting your assertion does not make the average holder of cash in the current climate feel any better I am sure. They are still losing buying power even if holding cash is not as bad as holding some other asset. You are beginning to sound like Nicola Sturgeon. Her answer to most things wrong in Scotland was along the lines of 'Well if you think it is bad here, just look at Westminster.'

Dod

[simoan]

I keep seeing comments like this which are misleading and wrong. We should do better on a financial website than peddling the dumb assertions of your average tabloid journalist. Inflation is a first derivative (the change in prices) so you can only compare it with the change in interest rates. The change in interest rates on cash in the past year has far exceeded inflation and so cash has been a very good place to be on a risk adjusted basis. Even the "preservation" trusts full of index linked Gilts and US Treasuries have lost you money.

Interest rate changes may now moderate but you could easily see up to another 0.5% increase being needed to control inflation which represents a further 10% increase in interest potentially i.e. still equal to, or greater than your 10% inflation. The cost of owning equities has gone up. Why hold an equity yielding 5% when you can get that risk free in a savings account?

Accepting your assertion does not make the average holder of cash in the current climate feel any better I am sure. They are still losing buying power even if holding cash is not as bad as holding some other asset. You are beginning to sound like Nicola Sturgeon. Her answer to most things wrong in Scotland was along the lines of 'Well if you think it is bad here, just look at Westminster.'

Dod

Well, it depends why you are holding the cash, but this idea that cash is losing "buying power" is wrong. It seems the penny has not dropped - you cannot meaningfully compare the interest rate on any given day with the rate of inflation on the same day. The fact is, holding cash in an interest bearing account has beaten inflation over the past 12 months. What more do you want? My SIPP has seen the interest rate paid grow from about 1% to 3%, a 300% increase in interest, which is way more than inflation.

And please don't compare me with that horrendous woman. There's not much I dislike more than nationalism, but let's not even go there.

[nmdhqbc]

To clarify things again, the idea was to hold cash as an income reserve, to provide income through periods of reduced dividend payments -- recessions like 2008-2009, or the pandemic.

i think you said you were not withdrawing from the SIPP. if/when you need to use this cash buffer i guess that will change and you'll start withdrawing. or maybe you will then swap the assets in the ISA / SIPP. sell some shares in ISA or GIA and buy them in SIPP so by taking the cash without paying any tax on SIPP withdrawals? just curious as to how you will use the cash buffer in the SIPP?

[nmdhqbc]

That's very short term thinking though. In reality, the interest on my cash holding has gone up about 300% in the last year. Much higher than inflation.

this is how i think of dividend rises of my investment trusts but that's because they tend to rise perpetually. so when i get a % rise in the dividend i feel like that a pay rise locked in for life. that complacency may be a mistake but it's how it feels. but interest on cash does not go up in perpetuity. they go up and down in cycles. it went down for decades and may go up for a while but it's not likely to be forever. that 300% pay rise feels like a one off and may reverse at some point. the erosion of the capitals real value is real and lasting though. before rate rises the difference between savings rates and inflation was lower than it is now.

I don't think most people understand that cash is a position in itself and a way of controlling risk at the portfolio level.

agree with this bit but i think of it as losing real value steadily in the hope that other assets fall by more and at some point you can pounce on them. but the cash is still losing real value even if the interest £ amount you get is going up.

[StepOne]

You are beginning to sound like Nicola Sturgeon. Her answer to most things wrong in Scotland was along the lines of 'Well if you think it is bad here, just look at Westminster.' Dod

And please don't compare me with that horrendous woman. There's not much I dislike more than nationalism, but let's not even go there.

Yeah, it was a bit bizarre, since nothing in your post remotely resembled the 'whataboutery' that Dod accused Sturgeon of.