An article in Citywire makes a startling revelation, and one that may have raised an eyebrow or two. It reports that the revenues Hargreaves Lansdown made from its client cash accounts skyrocketed by a staggering 976% in the six months to 31 December 2022.

The direct-to-consumer platform provider made revenues of more than £121 million on cash accounts ­– rising from £11.3 million between December 2021 and 2022. One reason for this might have been an increase in Hargreaves Lansdown clients switching to cash investments after becoming nervous about the bleak economic outlook in the second half of 2022.

Worryingly, FTAdviser also reveals that some of those who had switched to cash had a self-invested personal pension scheme (SIPP). While switching to cash may reduce your pension’s (or other investment’s) exposure to losses during economically volatile times, it could also reduce its long-term growth potential.

Read on to find out why increasing your pension’s exposure to cash might be something you regret, and why working with Citywire Financial Partners could help you make savvier decisions. Before you do, let’s look at why some investors might have switched to cash in the latter half of last year.

2022 was a “perfect storm” for the UK and global economy

As you probably remember, 2022 was particularly challenging economically. In the wake of the financial effects of the Covid pandemic and war in Ukraine, the UK’s financial woes were compounded when former chancellor Kwasi Kwarteng unveiled his “Mini-Budget” in September.

It sent the pound plummeting to an all-time low of $1.0327 and prompted a generationally-significant interest rate hike. It even led to an emergency intervention from the Bank of England to reassure the markets and help prop up pensions.

Furthermore, it led to fears that Britain could fall into a deep recession, which undoubtedly resulted in some investors becoming extremely nervous. As a result, some may have switched a higher proportion of their investments to cash, as it’s seen as being far less risky than stocks and shares.

While cash can reduce the risk of losses, it could come at a cost

Switching to cash may look like a savvy decision, but doing so could significantly reduce your money’s growth potential, which may have implications for your overall portfolio valuation.

SIPPs and other defined contribution (DC) pension schemes – otherwise known as money purchase pension schemes – are technically investments as they include assets such as government bonds and stocks and shares.

Typically, potential growth comes from higher-risk assets, such as stocks and shares. To demonstrate this, you may want to consider research carried out by Schroders, which found that between the start of 1952 and the end of May 2022, UK equities returned 11.7% a year on average.

This compares to cash, which returned 6% a year.

The trade off with greater growth potential, however, is increased exposure to potential losses. This is why some investors may be tempted to switch to cash to reduce the level of risk their pension or investment’s exposed to, especially if they intend to draw an income from it sooner rather than later.

Yet if this is something you have done, you may not realise that you may reduce the value of your pension or investment in real terms. Let’s look at this next.

Your pension pot might be reducing in value in real terms

According to FTAdviser, Hargreaves Lansdown pays a minimum of 1% on all accounts and up to 2.4% on cash in SIPP drawdown – although in March 2023, the Bank of England’s base rate of interest is 4%.

The Citywire article raises an important point on this, which is that while Hargreaves offers interest on its cash accounts, it keeps a significant chunk of the 4% – something that will have helped its revenues from client cash accounts skyrocket in 2022.

Aside from the revenue boost that the cash accounts have provided for the platform provider, its rates are also significantly lower than the UK’s rate of inflation. In February 2023, the Office for National Statistics revealed that inflation stood at 10.4%.

This means that the elements of your pension pot, or any other investments, that were sitting in cash were likely to be losing spending power as they won’t be keeping pace with it. As a result, the value of your pension or investment could be dropping significantly in real terms.

This makes FTAdviser’s revelation that the Financial Conduct Authority found that pensions on direct-to-consumer platforms tended to have almost twice the exposure to cash extremely worrying.

Get in touch

As you can see, while switching to cash may seem logical and could reduce your exposure to short-term risk, the long-term implications for your pension and retirement lifestyle could be severe.

Working with a financial planner could help you understand the long-term effects of moving into cash and how this may affect your lifestyle in retirement. At Citywide Financial Partners, we work closely with clients to help them understand the options available when the economy and stock market become jittery.

We rebalance clients’ portfolios regularly to ensure that our client’s pensions are exposed to as much growth potential as possible while maintaining a level of risk that is  suitable for them. This provides peace of mind for our clients that their pension is on track to provide the retirement they want, and that we’re always on hand to monitor and help them make better decisions with their wealth.

Please email theteam@citywidefinancial.co.uk as we’d be happy to help.

Please note

This blog is for general information only and does not constitute advice. It should not be seen as a substitute for financial advice as everyone’s situation will be different. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.