Ask ii: how can I hold cash but still earn interest inside a pension or ISA?

No question is a stupid one, so whether you want to find out what you need to do to start investing or how the stock market works, don’t be shy, ask ii. Email yours to: ask@ii.co.uk

Mark asks: I am getting close to retirement and want to hold some cash in my SIPP. With inflation creeping up, I would like to hold the cash in a deposit account or an investment that mimics a deposit account. Do you have any suggestions?

Sam Benstead, deputy collectives editor, interactive investor, (pictured above) says: Mark faces a very common problem. With inflation around 10%, and interest rates rising on savings accounts, holding cash inside a tax-efficient wrapper such as an ISA or a SIPP makes little sense.

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While interactive investor currently pays 0.5% interest on cash balances above £10,000, with different accounts treated separately, investors can get a better return, while taking very limited investment risk, by owning a money market fund.

Money market funds are a cash-like investment that can be held inside stocks and shares ISAs, SIPPs, or general investment accounts.

They own a diversified basket of safe bonds that are due to mature soon, normally within a year, meaning that investors can earn an income on their cash with minimal risk.

They are a safe place to hold your cash, without having to move it out of an investment account and into a traditional bank. Professional fund managers hold cash inside money market funds rather than in the bank.

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Money market funds will rarely pay interest as high as a savings account, but they do offer a return on your cash. So, they are more effective than just keeping money in cash which will be eroded more quickly by inflation. This return increases as interest rates rise, which is another benefit.

Royal London Money Market fund has been chosen for interactive investor’s Investment Pathways plan for those planning on cashing in their pension within five years and who do not want to take investment risk. It costs 0.1% a year and yields around 1.5%, as of October 2022. It has returned 0.75% this year.

There is no guarantee that the value of a fund will not fall, but money market funds are managed by professional fund managers whose aim is to maintain their value.

A money market fund is still an investment, even though it is low risk, and could go down in value. Bond prices can fluctuate over time, and it is also possible that a company may not be able to pay back its debt.

However, money market funds are diversified across many financial instruments and providers, so the risk of losing money is very low.