Treble the size of your pension
By taking a hands-on approach to our pensions, we can all enjoy a more comfortable retirement.
Many of us don’t think too much about our pension. For many, it’s just that chunk of money that comes out of our salary each month, there to be worried about once we’re getting greyer.
However, some new research has shown what a huge difference being engaged and hands-on with your pension can make to how comfortable your eventual retirement will be.
Hargeaves Lansdown has launched a SIPP Index, charting the performance of the most popular 20 funds help by investors in SIPPs last year. And according to the index, those top 20 funds have on average risen by a very healthy 89% over the past five years to December 2010.
Compare that to an average return of 26% from the 20 biggest pension funds and 24% from the FTSE 100 over this period, and it shows just how impressive a return you can get by being a bit more engaged with where your pension savings are going.
Clearly, if you can improve the return on your pension funds by three times just by actively engaging, it’s worth doing. Why have they done so well? And how do you work out where to start?
Why a SIPP?
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First, it’s worth looking at what a SIPP is and how it works. SIPP stands for self-invested personal pension, and the name says it all – it’s a pension where you choose where your pension savings are invested.
So unlike a traditional pension, where it is left to the insurer you have chosen to decide which investments to make, with a SIPP it’s all up to you. That presents both a huge opportunity and a huge risk, depending on your confidence when making investment decisions.
What you can invest in
There are plenty of different things that you can invest in with a SIPP.
Here’s a full list of what you can put your money into with most SIPPs:
- Stocks and shares
- Government securities
- Unit trusts
- Investment trusts
- Insurance company funds
- Traded endowment policies
- Deposit account with banks and building societies
- National savings products
- Commercial property (shops, offices, etc)
A mixed investment
According to Hargreaves Lansdown, there was a spread in risk levels across the top 20 funds. The funds in the top 20 were spread across 11 different sectors, including those that represent high risk but high growth areas.
However, for all of those daring investments, most of the biggest 20 pension funds are balanced managed funds, investing on a slightly more conservative basis.
This is really the whole point of investment – it’s all about spreading your risk, so that you have money in places where there is the potential for strong growth (but also the potential for it all to go horribly wrong), while also having some money in more conservative, safe areas.
For some ideas on which funds are worth considering, check out The UK's favourite investments.
What to look for in your SIPP
It used to be the case that SIPPs were only really for the richest elements of society, those with huge stacks of cash already set aside in their pension. That’s no longer the case, though it’s worth remembering that with many funds, you’ll be looking at a minimum investment of £1,000. As a result, a SIPP may not be a great option if you’re just starting out with your pension saving.
Jane Baker explains how to take control of your own retirement planning with a self-invested personal pension.
It pays to research the various low-cost SIPPs on offer carefully before selecting which one to go for, as they are certainly not all identical.
The first thing to consider is precisely where you can invest – with some SIPPs you won’t be able to invest in commercial property or overseas currency for example, so if your heart is set on making some cash out of fluctuations in the dollar, make sure your SIPP of choice allows you to do so!
Next, you’ll need to look at the charges. These can vary wildly from provider to provider, and in terms of where you invest. Obviously the idea is to pick a SIPP with as few charges as possible, which is why I really like the Vantage SIPP from Hargreaves Lansdown. There are no set-up fees, no charges on contributions nor an annual charge on cash and over 2,000 funds. Fund dealing is also absolutely free.
However, there are plenty of other low-cost SIPPs that are worth considering, depending on where you are planning to invest, such as the e-sipp from Sippdeal, the James Hay eSIPP and the Select SIPP from Alliance Trust, among others.
Staying engaged with your pension
Being engaged with your pension savings, and checking regularly how the investments are performing, is a fundamental part of using a SIPP. However, even if you don’t fancy taking quite such a hands-on approach with your pension, you should still keep engaged.
If a SIPP seems like too much bother to you, and you prefer to go with a standard pension, then it’s still vitally important that you keep up-to-date with its performance. A huge number of pension funds that are actively managed still perform pretty poorly, and offer a frankly poor return on the money you are putting aside each month. So if after a while you aren’t happy with your pension’s performance, do some research and move elsewhere!
Many of us won’t be able to rely on the State to cover the costs of our twilight years, so it’s of the utmost importance to get the best possible return out of the money you set aside each month.
There’s no excuse for standing back and allowing your pension to underperform.