Top tips for Sipps
- Created:
- 6 February 2007
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Hopefully, you have started off the new year with a series of financial resolutions – and one of them is to set up a self-invested personal pension (Sipp). Even if you already have one, it’s still worth taking this opportunity to look again at your existing provision to see if you can improve it. Then, suitably emboldened, I suggest you quickly whiz through my
10-point ‘Sipptastic’ tips for 2007.
- Make sure you commit sufficient funds to your Sipp. In fact, think long and hard about bothering with any Sipp fund that is valued below £50,000.
- Unless you have a fund in the mid hundreds of thousands – I’d suggest £300,000 as a minimum – don’t bother thinking about investing directly in property through a Sipp. The one exception is if you join a property syndicate that allows you to contribute, say, £50,000 at relatively low cost. But, even then, I’m not convinced by the existing plans on the market – especially their cost structure – so I would think carefully before buying in.
- Always calculate the effect of charges – use something called the total expense ratio (TER). You get this by adding up all the costs – administration, set-up and share dealing, for example – on an annual basis and then comparing it with your fund value. So, let’s say you have a £100,000 fund with an annual charge of £500. You also deal twice a month (say, £12.50 per deal) and you have £20,000 in unit trusts with an annual management charge of 1 per cent. Add it all up, and you’ve already got a TER of 1 per cent – which I think is acceptable. Anything above 1.5 per cent will be a major drag on returns in this low-returns climate, while anything above 2 per cent is clearly suicidal. So, do the maths.
- If you choose to hold cash in your Sipp, ask what the interest rate is – anything more than 2 per cent below the base rate is, frankly, a rip-off. If you are being ripped off, start hassling your provider and ask if you can hold cash in an external account, such as that offered by Newcastle Building Society. Alternatively, think about money-market funds that pay closer to the base rate.
- Ask your Sipp provider just how flexible its stock-broking service really is – for example, will it deal in exotic structured investment trusts listed offshore? What about Dublin-domiciled exchange-traded funds, or Jersey-listed investment trusts or even the London Stock Exchange International Retail Service quotes? If the answer is no, your choice is going to be severely circumscribed.
- While you’re on the phone to your Sipp provider, ask about all the little charges – for example, what it will charge to transfer in another pension or set up an income drawdown service. Compare these charges with market leaders such as SippDeal or Hargreaves Lansdown.
- Get your fund fees rebated. I’m continually astonished that so many people invest in unit trusts and open-ended investment companies (Oeics) but still don’t get virtually all of the initial fee and much of the annual fee rebated. As far as I’m concerned, a net initial fee above 1.5 per cent is totally unacceptable and annual net charges above 1.5 per cent are beyond the pale. So, if your broker won’t rebate these charges, leave immediately.
- Develop a strategy. I’d suggest working out an annual investing strategy and sticking to it. What you choose to do will vary with your risk tolerance, but I’d suggest mixing and matching high-cost, high-risk investments with lower-risk, income-based products. In addition, you should diversify across asset classes and countries. And, last but by no means least, adopt a core/satellite approach. I’d think about keeping a core fund invested in low-cost trackers or investment trusts with a satellite fund of higher-risk investments in sectors such as emerging markets or small caps.
- Hedge. Remember that Sipp investors can deal in covered warrants and contracts for difference, and that these products offer a brilliant way of hedging some of your portfolio. You should use them – even if they cost you a little in foregone returns, they’re worth it. Sipp investors need to be concerned first and foremost with absolute returns rather than returns against the market. As for hedge funds proper, I’d run a mile from most fund-of-fund hedge managers – and I’d be reluctant to invest directly in a hedge fund unless I had some capital guarantee.
- Unless you’re willing to devote a considerable amount of time to research and tracking the market, you shouldn’t have more than 10 holdings in your portfolio and you shouldn’t deal more than once or twice a month. I’ll be honest, I break the first part of this rule – I currently have 24 holdings in my Sipp, which even I think is a little excessive. Then again, I have both the time and the inclination to root out exotic investments and run the due diligence process over every share.
One final tip: some advisers are starting to offer hotel-room investment service GuestInvest through their Sipp platforms. This is a welcome innovation. Guestinvest offers you the chance to purchase a room in a hotel on a 999-year lease, receiving a return on your investment by renting it out and any capital appreciation on resale, in addition to a minimum 6 per cent return guaranteed in the first year of the hotel’s operation.
Sipp investors will also be able to gear up their investment by borrowing – under normal Sipp borrowing regulations, investors are able to borrow a maximum of 50 per cent of the value of their Sipp fund to buy the hotel room. It’s an interesting idea and offers some welcome diversification. However, it’s not really practicable, in my view at least, for investors with Sipp funds under £300,000.
David Stevenson's DIY pension: the state of play (launches as PDF)
