Where to hold SIPP cash buffer?

[MDW1954]

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?

Very loosely, the idea is to hold a year's expenditure as a reserve. The intention would be to rely on this reserve when the SIPP is in drawdown, ie when I am actually taking money from it. Once I reach a year's reserve, and assuming I don't wish to retire at that point, I will resume reinvesting dividends to further shares.

MDW1954

[Darka]

Very loosely, the idea is to hold a year's expenditure as a reserve. The intention would be to rely on this reserve when the SIPP is in drawdown, ie when I am actually taking money from it. Once I reach a year's reserve, and assuming I don't wish to retire at that point, I will resume reinvesting dividends to further shares.

MDW1954

This is pretty much what I intend to do with my SIPP; let the dividends build up for a year (as cash) and then take them out (monthly) as a UFPLS payment (in my case) for spending in the following year.

That way I know exactly what I can spend as I have the cash already.

[simoan]

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.

Yes, but the cash is just a holding, like any equities or bonds you may have in the SIPP. You have to look at everything in risk-adjusted terms and the performance of the overall portfolio is more important than some perceived loss of value of the cash holding alone. You need to be careful you don't lose sight of the purpose of the cash holding in de-risking and reducing volatility of the portfolio and invest it in riskier assets purely because of this idea it is losing money. I find it strange you never read of people concerned by loss of buying power when cash interest rates were zero and inflation was 2.5% over several years.

Personally, I don't understand why the OP would not just keep his "cash holding" as cash purely on a risk adjusted basis. This idea that you have to beat inflation over a set time period like a year seems wrong and senseless to me. As long as you comfortably beat inflation over the longer term in-line with the time over which the cash will be spent, that's all that matters. And if the cash is only intended for investment and is not fungible because it is tied up in a SIPP, for instance, it makes even less sense.

All the best, Si

[nmdhqbc]

Yes, but the cash is just a holding, like any equities or bonds you may have in the SIPP. You have to look at everything in risk-adjusted terms and the performance of the overall portfolio is more important than some perceived loss of value of the cash holding alone. You need to be careful you don't lose sight of the purpose of the cash holding in de-risking and reducing volatility of the portfolio and invest it in riskier assets purely because of this idea it is losing money. I find it strange you never read of people concerned by loss of buying power when cash interest rates were zero and inflation was 2.5% over several years.

when inflation is about 10% and interest is 3-4% that's losing real value. not nominal obviously but purchasing power is lost. differing perceptions do not change that fact. if you word it as this loss of value is worth it to reduce overall volatility then fine i agree but denying it is losing real value is just straight up wrong.

to me volatility reduction needs to be for a reason. if someone is 40 years from retirement you go for high vol, high returns. and the reason to lower volatility in retirement is because you're withdrawing from the portfolio. when bad times for the stock side of the portfolio happens that cash would come from the cash portion of the portfolio. so what's left in the portfolio then get's re-balanced a bit more back to higher stock %. in essence the portfolio re-balanced by taking cash out. just like in the good times the portfolio re-balances a bit back towards cash when you sell stocks. so the idea of the cash being there to wait for opportunities is in effect the same in the decumulation phase. just that rather than buying stock when a good opportunity arises it enables you to not sell some. honestly i don't think you and i disagree at all. i think it's all just different words being used to see the same way of doing things from a different angle.

[Dod101]

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.

Comparing you to that woman was purely incidental. I could not stand her. Your maths, whatever else, is suspect because an increase from 100 to 300 is an increase of 200% not 300%. Quite a difference and in any case, in discussing interest on capital with respect to cash, most are thinking of the buying power of the capital plus interest and that sure has lost out where interest is 3% and inflation is 10%.

Dod

[Dod101]

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.

Si said that holding cash is not as bad as holding some other asset and I asserted that that was a bit like NS when she was aked about long waiting lists or whatever and her stock response was always, 'They are not as bad as in England'. May not be a very good analogy but never mind.

Dod

[Urbandreamer]

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.

I'm not sure it your math is right.
Let us assume that you have £111 and invest it, getting 3%. You now have £114 (rounded figures).
Now if you consult the tables
https://www.rateinflation.com/consumer- ... rical-cpi/
The CPI basket moved from 111 to 121, 2021 to 2022.
I'd say that the value of cash had fallen more than the interest upon it replaced.

Of course the increase in the price of bread is far worse, but this is about maths rather than choice of how inflation is measured.

[simoan]

when inflation is about 10% and interest is 3-4% that's losing real value. not nominal obviously but purchasing power is lost. differing perceptions do not change that fact. if you word it as this loss of value is worth it to reduce overall volatility then fine i agree but denying it is losing real value is just straight up wrong.

In the very short term, yes, but I'm not investing for the short-term. Who is? As I have made clear, particularly whilst interest rates and inflation are changing, comparisons between the two are not meaningful because you are comparing a number with a first derivative, which is not valid. You didn't comment on my second point i.e. you don't have to beat inflation in the short term if you are going to be spending the cash over the long term. Who knows, by the end of the year inflation and interest rates could be the same so what's the point of investing all your cash into riskier investments now because you believe it is losing 6% of its value? Where does that get you? Nullifying the effect of inflation is not easy to achieve as the performance of the specialist IT's aimed at that market have shown over the past year. What is far more important IMHO in the short term is capital preservation and risk-adjusted returns.

All the best, Si

[nmdhqbc]

In the very short term, yes, but I'm not investing for the short-term. Who is? As I have made clear, particularly whilst interest rates and inflation are changing, comparisons between the two are not meaningful because you are comparing a number with a first derivative, which is not valid. You didn't comment on my second point i.e. you don't have to beat inflation in the short term if you are going to be spending the cash over the long term. Who knows, by the end of the year inflation and interest rates could be the same so what's the point of investing all your cash into riskier investments now because you believe it is losing 6% of its value? Where does that get you? Nullifying the effect of inflation is not easy to achieve as the performance of the specialist IT's aimed at that market have shown over the past year. What is far more important IMHO in the short term is capital preservation and risk-adjusted returns.

honestly i don't know what we're even talking about anymore. these things you talk of here have not been commented on by me yet you're talking like we disagree. i comment on very specific thing you said. one being this year my interest on my cash grew more than inflation i beat inflation. and using cash in the portfolio to reduce volatility. those are the two things i commented on and you veer off into all sort of stuff i can't be bothered looking at. derivatives? i'm done now on this but for others who might want to continue why don't you explain what you mean in simple term because you're assuming everyone is as knowledgeable and clever as you obviously are. i vow down to your superiority. well done.

[simoan]

Your maths, whatever else, is suspect because an increase from 100 to 300 is an increase of 200% not 300%. Quite a difference and in any case, in discussing interest on capital with respect to cash, most are thinking of the buying power of the capital plus interest and that sure has lost out where interest is 3% and inflation is 10%.

Dod

Sorry. My calculation was based purely on the fact that the HL interest rate is currently 3% and that my monthly interest is 3x what it was a year ago even though I have less cash. Tbh I don't know exactly what the HL rate was 12 months ago but thought from memory it was around 1% although thinking about it, it must have been lower than that. I just know I am receiving 3x more interest monthly. So my 300% was conservative. I think the real increase is actually more than that.

[simoan]

In the very short term, yes, but I'm not investing for the short-term. Who is? As I have made clear, particularly whilst interest rates and inflation are changing, comparisons between the two are not meaningful because you are comparing a number with a first derivative, which is not valid. You didn't comment on my second point i.e. you don't have to beat inflation in the short term if you are going to be spending the cash over the long term. Who knows, by the end of the year inflation and interest rates could be the same so what's the point of investing all your cash into riskier investments now because you believe it is losing 6% of its value? Where does that get you? Nullifying the effect of inflation is not easy to achieve as the performance of the specialist IT's aimed at that market have shown over the past year. What is far more important IMHO in the short term is capital preservation and risk-adjusted returns.

honestly i don't know what we're even talking about anymore. these things you talk of here have not been commented on by me yet you're talking like we disagree. i comment on very specific thing you said. one being this year my interest on my cash grew more than inflation i beat inflation. and using cash in the portfolio to reduce volatility. those are the two things i commented on and you veer off into all sort of stuff i can't be bothered looking at. derivatives? i'm done now on this but for others who might want to continue why don't you explain what you mean in simple term because you're assuming everyone is as knowledgeable and clever as you obviously are. i vow down to your superiority. well done.

Sorry, inflation measures the difference in prices 12 months apart, so mathematically it is a first derivative. Why do you think comparing a rate of change, like inflation, with a static number, such as the current interest rate, is valid? BTW I don't think we disagree at all. I probably just haven't explained myself very well, a bit like the OP I agree we're veering OT now, so, I'm out.

All the best, Si

[simoan]

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.

I'm not sure it your math is right.
Let us assume that you have £111 and invest it, getting 3%. You now have £114 (rounded figures).
Now if you consult the tables
https://www.rateinflation.com/consumer- ... rical-cpi/
The CPI basket moved from 111 to 121, 2021 to 2022.
I'd say that the value of cash had fallen more than the interest upon it replaced.

Of course the increase in the price of bread is far worse, but this is about maths rather than choice of how inflation is measured.

Inflation is a rate of change over a 12 month period. As such I was comparing it to the rate of change in interest rates over the same 12 months. The rate of change in interest rates, and hence amount of interest received, has been far higher than inflation. Of course, that is very unlikely to repeat in future but on a risk adjusted basis has worked well given the FTSE ALL SHARE has only returned 4.5% over the same time and the much lauded "preservation" IT's have suffered a negative return.

All the best, Si

[simoan]

I'd just like to apologise to the OP and readers for my contributions here, which I believe have not been helpful. I've conflated various points across multiple posts and just confused matters. After no more than an hour of sleep last night I probably shouldn't have posted. I guess I view the purpose of cash within a portfolio differently to others, particularly where it is not directly fungible (in this case, cash held within a SIPP as per the OP). As such, my focus is purely on risk adjusted returns, nothing else.

All the best, Si

[Dod101]

Your maths, whatever else, is suspect because an increase from 100 to 300 is an increase of 200% not 300%. Quite a difference and in any case, in discussing interest on capital with respect to cash, most are thinking of the buying power of the capital plus interest and that sure has lost out where interest is 3% and inflation is 10%.

Dod

Sorry. My calculation was based purely on the fact that the HL interest rate is currently 3% and that my monthly interest is 3x what it was a year ago even though I have less cash. Tbh I don't know exactly what the HL rate was 12 months ago but thought from memory it was around 1% although thinking about it, it must have been lower than that. I just know I am receiving 3x more interest monthly. So my 300% was conservative. I think the real increase is actually more than that.

No your 300% is wrong. The point is that an increase from 100 to 300 is a 200% increase. That is the point I was making. So 200% may be conservative I would not know.

Anyway just noticed your apology for which thanks.



Dod

[SteveJ]

Vanguard Sterling Short-term Money Market Fund maybe?

[simoan]

Vanguard Sterling Short-term Money Market Fund maybe?

How much does it pay? Looks like 2.3% which is worse than the 2.5% interest most UK brokers are paying on SIPPs with more than 10k cash. Given the charges involved, it doesn’t seem to make much sense for the OP.

[SteveJ]

Over 4% since December I think but obviously varies as interest rates change.

[simoan]

Over 4% since December I think but obviously varies as interest rates change.

Ok but I guess it depends on how your broker charges for holding funds in the SIPP then for this to be an option. The OCF is 0.12% and then you would need to take account of any broker platform charge.

[vand]

You don't need anything like a 1yr cash buffer, and you especially don't need it if you are

a) still working
b) financially secure

3 months, max.
Why keep more cash than you need? All it does it lose purchasing power.

[Alaric]

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.

Inflation is the change (increase) in prices. Interest is the time value of money. So suppose a good costs 100 this year and 110 next year. If you have 100 in cash this year, earn 3 in interest, then you have 103 next year. I make that a net loss in purchasing power. I don't see the point of measuring the change in interest rates, it's the absolute value that matters and how that compares to the cheange in prices.