Should you hold cash or a money market fund in retirement?
A money market fund tracks short-term interest rates closely and sits inside your ISA or pension wrapper; a deposit account is covered by the Financial Services Compensation Scheme to £85,000 per institution. Neither is strictly better — the choice turns on where the money needs to live and how much of it there is.
- Money market funds: track short-term rates, sit inside an ISA or pension, and are not FSCS deposit-protected.
- Deposits: protected to £85,000 per banking institution, and often slower to follow rate rises.
- Inside a wrapper: a money market fund is usually the only way to hold cash-like assets in a SIPP.
- The practical split: near-term withdrawals in the wrapper, emergency money in a protected deposit.
01 What each one actually is
A money market fund holds very short-dated instruments — treasury bills, certificates of deposit, short government debt — and its yield tracks short-term interest rates closely. It is a fund, so its value can move, though for a well-run sterling fund the movement is small.
A deposit account is a claim on a bank. It cannot fall in nominal terms and it is covered by the Financial Services Compensation Scheme to £85,000 per banking institution, which is the protection people mean when they call cash safe.
The two protections are different in kind. FSCS deposit cover protects the money if the bank fails; investment cover for a fund protects against the failure of the provider, not against the fund's value falling. Conflating them is the most common error in this comparison.
Source: FCA consumer information
02 Where each belongs
Inside a SIPP or a stocks and shares ISA, a money market fund is usually the only practical way to hold something cash-like. Most platforms pay a poor rate on uninvested cash balances and keep part of the interest, so a fund is both simpler and better yielding.
Outside a wrapper, a deposit account is the natural home for money that has to be available and protected — an emergency reserve, or the next year's spending. It also avoids the disposal and reporting questions that come with a fund.
For a drawdown cash buffer the answer is usually a money market fund held inside the same wrapper as the portfolio, because moving money out of a pension to hold it in a bank account creates a taxable event for no benefit.
03 The £85,000 limit and the rate
FSCS cover is per person per banking institution, not per account, and several high-street brands share a single licence. A household with £200,000 in cash needs it across at least three unconnected institutions to be fully covered, and checking which brands share a licence is a five-minute task worth doing.
On rate, money market funds follow base rate changes almost immediately while deposit accounts often lag, particularly on the way up. Over a period of rising rates that gap is real, and over a period of falling rates it runs the other way.
Neither is a long-term home for retirement money. Both are close to the Bank Rate, and after inflation and tax that is often a small negative real return — which is why cash is the right answer for near-term spending and the wrong one for the second half of a retirement.
Shows: the difference a rate gap makes on a cash holding, and how much of it is covered by FSCS protection. Ignores: tax on the interest, fund charges, and any movement in the fund's value.
On the defaults above, the worked example shows £1,080 a year. FSCS deposit protection would cover £85,000 of this at one institution, leaving £35,000 to be spread elsewhere.
Source: Bank Rate and how it works
Two rules and they cover most of it. Inside a pension or ISA, use a money market fund — platform interest on uninvested cash is usually poor and the provider keeps part of it. Outside, use deposits and keep each institution under £85,000, remembering that several familiar brands share one banking licence. What I would not do is treat either as a place to keep retirement money for a decade. Both track the Bank Rate, and after inflation that is a slow loss dressed up as safety.
FAQ
Are money market funds covered by the FSCS?
Not by deposit protection. Investment protection covers the failure of the provider rather than a fall in the fund's value, which is a different thing from the £85,000 deposit cover people usually mean.
Can I hold cash in my SIPP?
You can, but most platforms pay a poor rate on uninvested balances and retain part of the interest. A money market fund held inside the SIPP is usually both better yielding and simpler to manage.
Is £85,000 per account or per bank?
Per person per banking institution, and several familiar brands share a single licence. A household with substantial cash needs it spread across unconnected institutions to be fully covered.
Sources
Regulator references
- FCA consumer information · Financial Conduct Authority · 2025The regulator's own consumer guidance on the products discussed here.Last verified: 2026-09-07
- Individual Savings Accounts (ISAs) · GOV.UK · 2025The annual subscription limit and the rules on transfers between ISAs.Last verified: 2026-09-07
- Bank Rate and how it works · Bank of England · 2025The policy rate that drives the mortgage and cash comparisons here.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.