Most people know that Self Invested Personal Pension Plans, or SIPPs for short, offer the investor the opportunity to invest in a wider range of investments than Personal Pension Plans.
SIPPs are often used as vehicles to perhaps buy a property, shares or so that an investment manager can be appointed. They are generally thought of as a product used by more sophisticated investors who are prepared to take more than an average level of risk, however this is not necessarily the case.
Many canny, risk adverse investors, are using SIPPs to invest in a range of investments where the capital is guaranteed not to fall and that provide a positive risk free return.
So, why might you want your pension fund to invest in a capital guaranteed investment?
There are a number of reasons why you might to use your pension to buy an investment which is guaranteed not to fall in value, some of the more common ones are:
- If you are planning to retire in the short term, say within the next three years, an investment with a capital guarantee will mean your fund is not exposed to riskier assets which could fall in value prior to retirement. This would have the effect of giving you a smaller fund with which to purchase an Annuity or move into Income Drawdown with
- If you have a low appetite for risk, perhaps you have had your fingers burnt by the stock market over recent years, you may decide to that an investment where the capital is guaranteed is for you
- You may prefer the smoother returns that you tend to get from a capital guaranteed investment compared to equity based investments where the returns tend to be more volatile
- You may not need to make excessive returns to meet your retirement objectives
Why use a SIPP?
Most Personal Pension Plans offer a wide variety of funds to invest in, including a Cash or Deposit fund, which are deemed to be low risk.
However in these times of low interest rates the returns have been poor. Indeed some funds have shown negative growth as the management charges have outstripped the return of the fund. This has led investors to look at alternatives as they try and get a positive return on their pension fund, and a SIPP allows them to do this by investing in a wider range of options.
Aren’t SIPPs expensive?
Historically SIPPs have been seen as more expensive than Personal Pension Plans, however over recent years the costs of investing via a SIPP have fallen.
SIPPs can now be bought relatively cheaply and often have lower charges and costs than Personal Pension Plans.
Clearly each case is different and for a smaller pension fund a SIPP may not be viable, however it is always worth checking out, you may be surprised by how low the charges are.
What kind of guaranteed investments can my SIPP hold?
The capital guaranteed investments that can be held in a SIPP generally fall into one of three categories:
1. Deposit accounts. Individuals can invest in deposit accounts, so can a SIPP and they generally work in the same way. The longer you are prepared to commit your savings for the better the interest rate.
When you invest personally you shop around for the best rate, the same should be done when your SIPP opens a deposit account, and remember the rules of the Financial Services Compensation Scheme apply to money that you hold in a SIPP
2. Structured Products. These types of plans fall into two categories, deposit and investment based. It is the deposit category that generally offers a capital guarantee. The deposit based plans are just that, deposits held with a bank for a fixed term. The return you get is linked to an index, often the FTSE 100. As the plan is deposit based your capital at maturity is guaranteed to be returned to you and generally it is also covered by the Financial Services Compensation Scheme, up to £50,000 per person, providing of course that the bank is a member of the scheme
3. Guaranteed funds. These offer access to equities, both UK and overseas with a guarantee that the value of your investment will not fall. They do not work in the same was as more traditional equity funds as they do not give the full positive return using some of the gains to effectively meet the cost of the capital guarantees.
Typically all three types of investment may be used with the fund split between them taking into account, amongst other factors, the length of time until retirement, how income will be taken in retirement, other savings outside of the pension, and the investor’s knowledge and experience.
What are the downsides?
As with any investment decision there are possible disadvantages to these types of investments.
Before any transfer takes place it is important to consider whether the existing pension will apply any penalties on transfer, if any benefits such as a guaranteed Annuity rate will be lost and also to consider whether the charges on a SIPP will be more or less expensive that the existing plan.
Whilst the investments outlined above are carry no risk to capital, assuming that amounts invested are covered by the Financial Services Compensation Scheme, there are risks to consider. It is important that for a prolonged period your investments give a return as close as possible to inflation, this may not always be possible with these types of investments. Furthermore there is the risk that they will not perform as well as other asset classes, such as shares, property, gilts or corporate bonds.
It is important to weigh up the advantages and disadvantages and then make the decision that is right for you taking into account your individual circumstances, needs and requirements.
If you believe that reducing the risk that you are taking with your pension might be the right thing for you, we would suggest that you take independent financial advice to allow you to better understand the options open to you.
Here at Investment Sense we have a wide range of services to help you make the right decisions with your money and will spend time formulating the right advice only when we have understood your requirements.