04 Mar 2011 | Capital Hill

Capital Hill on...Sipps 

They’re becoming increasingly popular with investors looking to take control of their retirement planning – and it’s a strategy that could boost your pension prospects says Jennifer Hill.

According to recent research by the financial services group Hargreaves Lansdown, the 20 biggest self-invested personal pension (Sipp) funds have comfortably outperformed the UK’s 20 biggest pension funds overall. They have risen by an average of 89% over five years to December 2010, according to the inaugural Hargreaves Lansdown Sipp Index (a new index to chart the performance of the 20 most popular funds held by investors in its own branded Sipp). That compares with an average return of just 26% from the biggest 20 pension funds and 24% from the FTSE 100 index over this period. Over all 36 periods analysed, the Sipp funds on average did better than the big insurance company pension funds.

So, what accounts for such a stark difference? Well, Sipp investors – generally more sophisticated than your average personal pension investor – can be more comfortable taking greater risks.

The biggest 20 Sipp funds hold investments across 11 sectors, including emerging markets and natural resources – areas that are considered higher-risk and, therefore, have the potential for higher growth. Some of the funds in these sectors have notched up stellar performances over the past five years.

Most of the largest 20 pension funds (representing over £100 billion of assets) are ‘balanced managed’ funds, investing more conservatively and, therefore, returning less over the long-term.

Indeed, Sipps usually afford a far wider investment universe. Most pensions enable investors to hold things like unit trusts, open-ended investment companies (Oeics), gilts and corporate bonds.

However, you can put other things in a Sipp too, like investment trusts, individual company shares, exchange-traded funds and commercial property.

Global investment trusts can be the bedrock of equity exposure in Sipps, bringing all that these trusts – the granddad of the fund world – have to offer. As investment trusts usually have a fixed number of shares, a stable pool of money lets the manager plan a long-term investment strategy.  If shareholders sell their shares in the trust, the shares will be bought in the market by other investors and the manager is not forced to sell the underlying assets. 

Buying into such funds allows you to tap into specific countries or sectors, while others – such as Scottish Mortgage, Witan and F&C – invest globally.  Whatever your investment philosophy, by regularly investing in your pension – and buying shares in these trusts – you could wind up with a portfolio of some of the best companies in the world.

In contrast to this wide investment universe, big insurance company pension funds tend to offer default funds, especially for group schemes. These have to be managed on a one-size-fits-all basis because they contain the savings of hundreds of thousands of diverse individuals, so a conservative management style, which results in index-hugging, is perhaps unsurprising.  The upside of these funds though, is that they tend to be cheaper compared with the more risky self select funds.

Another thing that can affect a pension’s performance is something called ‘life-styling’. Life-styling means that pension money is moved into lower-risk assets classes such as bonds and cash, in the years immediately prior to the chosen retirement date. During times when the stock market is performing well, clearly you will lose the upside of your equity investments.  The converse however is also true and life-styling could help to protect the value of your pension when the stock market is falling. The default retirement age will be scrapped come April, and engaged investors can choose to move their retirement age or manage the de-risking process themselves. Big pension providers with their automated systems could struggle to find a solution to this conundrum.

Sipps let retirement savers take control, but they aren’t without their downsides. Although the cost of Sipps – once the preserve of the wealthy, due to high charges – has fallen significantly in the past decade, they still typically cost more than standard personal pensions. Investors generally need at least £50,000 if not £100,000 to make a Sipp worthwhile. Even then, make sure you make full use of the investment flexibility you’re paying for.

The views expressed in this article are those of the author and should not be considered as advice or a recommendation to buy, sell or hold a particular investment.  They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

Past performance is not a guide to future performance.  All investments you make in a Sipp are subject to risk and the value of these investments and any income from them can go down as well as up, and you may not get back, in the form of pension benefits, the amount you originally invested. Where a trust invests overseas, exchange rates can also affect value and income.  Current tax rates and reliefs and the tax treatment of pensions may change.

Investing for retirement is a complex subject and a Sipp is just one of the many different pension options available.  If you are unsure whether a Sipp is suitable for your circumstances you should contact a financial adviser.

Author: Jennifer Hill
Jennifer is an award-winning British financial journalist. She recently left The Sunday Times, where she was deputy Money editor, to set up her own company, mediahill Ltd. She is a previous personal finance correspondent of Reuters, the global news service, and personal finance editor of The Scotsman newspaper.

She has won or been shortlisted for six Headlinemoney awards, the ‘Oscars’ of personal finance journalism in the UK. She has also scooped or been nominated for accolades from the Association of Investment Companies, Ignis Asset Management, the Association of British Insurers and the British Insurance Brokers’ Association.