Pension investors miss out on rally

Pension investors, many of whom saw their funds lose more than a third of their value in the recent downturn, have missed out on much of this year’s equity market rally because their portfolios are now so heavily skewed towards cash.

Providers of self-invested personal pensions (Sipps) have reported a swing away from equity markets over the past year, with many investors amassing a third or more of their total fund value in cash. Some advisers warn that these investors have taken too long to move back into equities as markets have rebounded.

“There has been a rapid turnround in the markets in the first few months of this year and investors are thinking should they now go back in,” says Malcolm Cuthbert, partner at Killik & Co, the adviser.

He notes that there has been some movement back into equities in the past few months – the average cash holding in Killik’s Sipp accounts is now around 17 per cent, compared with 22 or 23 per cent at the end of last year – but he believes this has not been fast enough.

“We are still seeing clients holding too much in cash in their pension,” adds Cuthbert. “Some have £2m-£3m in cash and are not yet moving back into the markets.”

Investors who have retained large cash positions over the summer have missed a strong stock market rally. The FTSE 100 has gained 11 per cent since the end of May as economic indicators have started to improve.

But investors who are considering returning to equities are advised to do so gradually to avoid being caught out by any sudden market falls.

Tom McPhail, head of pensions research at Hargreaves Lansdown, said investors who are overweight in cash will have some good opportunities to return to the market over the next few months.

“It is reasonable to suppose there will be further dips and investors should look to reinvest when that happens,” he says. “They may be quite relaxed, even if they have missed out on the recent market gains as there is no certainty how permanent those gains are.”

Research from Investec Private Bank found that a quarter of pension administrators have seen clients increase the cash in their Sipps by up to 25 per cent in the past year. A further 13 per cent said clients lifted their cash holding by up to 50 per cent.

These investors have also faced a double hit as the rates of interest on pension cash accounts tend to be poor. Most accounts pay less than 1 per cent interest which, in a long-term investment such as pensions, will be eroded by inflation.

Many of the low-cost Sipp providers only allow investors access to their default cash accounts.

AJ Bell’s low cost Sipp pays just 0.1 per cent on cash balances over £50,000 and 0.05 per cent on smaller amounts, while Hargreaves Lansdown pays 0.25 per cent on balances above £50,000 and nothing for sums less than £1,000.

Some providers such as Killik & Co offer fixed term deposit accounts paying slightly more, although these rates have fallen sharply in the past year.