How to put together your SIPP
SIPPs offer the chance to control your own retirement, but the wrong decisions will cost you.
I’ve been thinking a lot about my retirement lately. It might be because I’ve just become a father, and seeing my parents and in-laws playing with my son has made me realise how important it is that I get my finances sorted so that I can pack in work at an age when I’m still able to play with any grandchildren I might have.
But it may also be because now is a great time of change in the pensions world. We have the Government talking big about revamping public sector pensions, European directives changing how the annuities we will likely rely on to pay for our retirement are calculated. It’s all given me a much-need kick up the backside to attempt to take control of my financial destiny.
And that means sorting out my SIPP.
A more comfortable retirement
A SIPP is a self-invested personal pension. That means that rather than handing over your cash to a pension provider, and leaving their fund managers to decide where to put it, you make those decisions yourself. Scary stuff.
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But as I explained in Treble the size of your pension, taking a hands-on approach to your retirement funding can leave you with far more cash at your disposal upon retirement than leaving it to the experts.
So if you’re going to invest in a SIPP, what do you need to consider? And where should you be putting your money?
All SIPPs are not the same
The first thing to be clear about is that SIPPs are not all the same – they each offer a slightly different service, and so you should be very clear about what you are signing up for before you open an account.
Some will allow you to place virtually any investment within the wrapper of your pension plan, including things like commercial property. These tend to be on the more expensive side of the spectrum.
However, there are also low-cost SIPPs, designed to give the likes of you and me a little more autonomy, offering a range of funds to invest in, as well as a share-dealing service so you can pick the specific firms to invest in.
What to invest in
Below is a list of the sorts of things you can generally invest in with a SIPP.
- 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)
OK, so you’ve opened your SIPP, you have a stack of cash that you’ve been squirreling away for a while in front of you... now what?
A simple thing to do with the cash is invest it into a few different funds. A fund is a way to spread your investment; rather than you picking out a number of individual stocks and shares to invest in, you put the decision in the hands of an expert – a fund manager.
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That way, the investment decisions are being made by experienced investors, rather than just your gut feeling that Tesco is going to have a good couple of years, for example. But there are so many funds out there, how do you pick which ones to go for?
There’s no definitive answer on this sadly. Perhaps you want to put your trust into one of the ‘superstar’ fund managers? Or perhaps you want to use past performance as a guide (always a somewhat risky tactic)? Or perhaps you want to take a bit of extra risk, in order that you may benefit from greater growth than from more conservative investments?
Before you invest in any fund, be sure to read the fund’s prospectus so you are clear about the investment strategy of the fund manager (and their own track record), where the fund is currently invested, and what charges will apply in future.
Going with a tracker
Of course, there are plenty of people who have very little time for fund managers and the decisions they make.
Instead they prefer the relative predictability of a tracker fund. As the name suggests, a tracker fund tracks the progress of a specific investment index. So if you go with a FTSE100 tracker, and the value of the FTSE100 increases by 20%, your investment should increase in value by about 20% too.
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The negative to this is of course that they will never outperform the market. The counter to that is that plenty of actively managed funds fail in this respect too. What’s more, trackers are cheap and easy to understand. Have a read of Six great reasons to choose an index tracker for more.
With a SIPP you should be able to buy shares in any firm listed on any stock exchange.
However, the cost of trading can vary significantly, from £9.95 per trade up to as much as £100. So if you’re planning on doing a fair bit of wheeling and dealing with your share portfolio, it pays to find a SIPP with smaller sharedealing charges.
Spreading your risk
As with any investment, the idea is not to leave yourself overexposed to one single area. So while investing in an Emerging Markets fund may give you a great return for a while, you don’t want to have your entire pension relying on continued stability in Brazil – a few more stable investments, as a safety net, is always a good idea.
And if this all sounds a bit too much like hard work, there's no shame in sticking with a more traditional personal pension. Just be sure to keep on your toes and monitor the performance of the pension - if it isn't doing too well, don't hesitate in moving it elsewhere! And make sure you follow the advice in 3 ways to boost your pension you've never heard before!