Spice up your pension: tips on SIPPs
First published 30 March 2016 • Updated 19 July 2019
If you thought pensions were dull, think again. A SIPP can give you a taste of active investing, letting you make the big choices about how to invest your retirement fund. It can be exciting but comes with higher risk too – so how do you decide if it’s right for you?
What’s the difference between DIY and custom-made? Answer: one of them is wonky.
Well, not always. But many of us have discovered first hand that making something for ourselves is the surest way to get it perfect – or muck it up completely. When the item in question isn’t a shelf but your pension savings, the prospect can be off-putting, so you end up playing safe. Yet it’s certainly possible to achieve a more prosperous retirement through a bit of financial DIY (or rather, customisation).
SIPPs (self-invested personal pensions) certainly aren’t for everyone. These pensions appeal to those who are attracted to the world of investing, who want to take a more active role. Opening a standard pension scheme (such as a workplace or stakeholder pension) is relatively simple – your involvement is generally limited to making monthly contributions, and all the investments are managed for you. You often have the option of choosing a particular fund, but most people don’t know enough to make an informed decision here, so will simply go for the default fund suggested.
A SIPP is about as different from that as you can get.
Introducing the SIPP
If you’re not a ‘default fund’ sort of person, if you like to spend a bit of time thinking about where to put your money, and if you think you would enjoy the challenge of a more hands-on approach, then a SIPP could be for you. There are also attractive if you are put off by the funds charged by other types of pension, as the DIY aspect generally makes them cheaper. However, you shouldn’t just look at them as a way of saving costs. It’s more important that you have a genuine interest in investing and wish to get more involved. Plenty of high or very high earners prefer a SIPP, not for the cost savings but for the potential for greater returns.
A SIPP enables you to apply the tax benefits of a pension to an investment portfolio that you choose yourself. You could see it as a way to try and ‘beat the market’ – put together a fund of your own design which is better suited to your needs than the funds offered by pension providers, and without such high administration charges.
The advantages of a SIPP
You get a much broader range of investment options with a SIPP. Within the pension wrapper you can keep assets including:
- Individual stocks and shares
- Government securities
- Unit trusts
- Investment trusts
- Insurance company funds
- Traded endowment policies
- Deposit accounts with banks and building societies
- Some NS&I products
- Commercial property
Some SIPPs also let you include residential property through certain collective investments, such as real estate investment trusts (REITs).
A SIPP lets you gather a variety of pensions into a single pot, so you are no longer trying to keep track of lots of plans from previous employers. This also makes it easier to monitor how close you are to the lifetime allowance (reduced to £1 million from this April).
The biggest advantage is that you can manage your own pension fund to meet your changing needs. In the wake of pension freedom this is particularly useful, as it can make your options even more flexible. You also have complete control over the level of risk you are exposed to.
You may be able to persuade your employer to contribute to your SIPP instead of your workplace pension. However, they don’t have to do this. If they won’t, you will want to hold a workplace pension too, so as not to miss out on those valuable employer contributions.
What about the downsides of a SIPP?
The negatives are similar to the positives: you have more control, which means you may have no-one else to blame if things go wrong. Taking investment decisions based on scant knowledge is usually a quick route to big losses – so never assume you can do something just because it looks easy.
You may also find that a SIPP takes up more of your time than you expected. If you are working full-time it may be hard to devote as much attention to it as it needs; similarly, in later retirement you may not want the continued stress. That said, in early retirement it might serve as a diverting occupation!
The problem of both time and money can be easily solved by engaging a financial adviser to help you. The adviser’s fees are likely to be lower (over the long term) than the administration costs of a stakeholder pension, but their expertise in choosing the right investments can be invaluable. They can also save you time by administering the SIPP on your behalf.
How to set up a SIPP
First, identify all your current pensions, so you can move them into the SIPP. You can’t move your state pension, but most company or personal pensions can be moved.
Second, decide how much risk you can take. The rule of thumb is that you can take more risk the younger you are, and the more you earn. The other rule of thumb is that higher risk can mean higher rewards over time. Remember that taking very low risk is a risk in itself – because your investments may not grow enough.
Now identify where and how you want to invest your funds. This is the complex part, so you will probably want to involve your financial adviser. You will need to make sure that your choice of investments matches your attitude to risk (see above). Don’t choose investments just because they look good – keep that risk-reward strategy in the front of your mind.
Unless you already have some experience of active investing (that is, managing funds on a regular basis), ask your financial adviser to provide a ‘discretionary management service’. This means that they make the day-to-day investment decisions for you, based on your stated aims. As time goes on you may grow confident enough to take over this task yourself.
Remember too that a pension is a long-term investment. Reacting impulsively to every dip and surge of the market is not a good strategy for a SIPP (or for any portfolio of equities). So instead of trying to time the market, develop mid-term and long-term strategies.
Find out if you’re suited to a SIPP
By now you probably have a good idea about whether a SIPP might suit you. A financial adviser can help you make up your mind – most offer a free initial meeting to discuss issues like this, so you can explore the possibility at no obligation.
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