In many circles, pensions have a reputation for being as dull as dishwater. And with two-thirds of defined contribution (DC) pensions' investments in dreary default funds, it's easy to see why they've washed up with a lame reputation.
Most DC pension plans give their members a degree of choice over the investment strategy for their contributions. However, many plans also offer a 'default' fund for members unable or unwilling to choose their own investment strategy.
Default funds' prospects are tepid at best. With average returns currently at around 6.66 per cent a year, investing in one can leave you with a pension around half as big as the pot you'd build by investing in better performing funds.
Beating this kind of performance isn't rocket science. The Association of British Insurers' (ABI) Sectors are a system for the classification of life and pension funds. Over 20 years, the ABI UK All Companies sector has a 7.28 per cent return, while the FTSE All-Share index and the MSCI World Index have returned 8.06 per cent and 7.16 per cent, respectively.
These kind of returns from pension funds are respectable but not exactly eyebrow raising. And thousands of Brits are growing restless with mediocre money-making. Eager to save their pensions from stagnating, some savers are going one step further than plain risk-taking to drive top returns. They're getting creative.
Around 200,000 UK investors now have bespoke self-invested personal pensions (Sipps), flexible pensions into which they can pop the whole range of eligible alternative investments for Sipps and take responsibility for their own investment decisions. We've come across a myriad of interesting investments in Sipps. A police station, a pet shop, a church house, Dubai hotel rooms, bamboo shoots and storage units are just some of the unlikely components of the private pensions of the adventurous.
And the returns on most of these investments really are enough to make you jump out of your seat. But while a number are genuinely capable of driving your annual performance up three-fold from an average investment, others could leave your accounts in turmoil, and in the worst cases gobble up your pension altogether.
Another day, another dodgy investment
It's easy to be dazzled by the prospect of 15 per cent annual returns, but while many exotic investments are legit, more often, they're too good to be true. The dangers of investing in unregulated investments through your Sipp are well documented by the press, but still every day, hundreds of savers funnel their hard-earned cash into them. Many will never see their money again.
The latest scare story to hit the press, and cause Sipp providers to suspend dealings with it, was Harlequin properties, a property investment company in the Caribbean into which thousands of British investors have channelled money. And reports of dodgy unregulated investments have been rife since 2008's financial crisis.
Investors Chronicle has received numerous reader emails on the issue, and last year we helped a man suffering from mental health issues claw back his entire pension from an unregulated bamboo plantation investment, after he was badly advised by an unregulated financial adviser and lost everything.
Regulation surrounding risky Sipp investments is riddled with gaping holes that investors like you can accidentally slip through. But if you have a trusted adviser, stick to the rules and do your research properly, you can avoid 'horror story' endings you often read about and give your Sipp the boost it needs.
How can I get creative with my Sipp?
Property (residential and commercial)
Sipps allow you to buy and invest in UK commercial property directly. This can be a good idea if you are self-employed and want to use your pension to help buy your business premises. This allows you to become your own tenant and pay the rent into your pension, which is handy, but you can also use it to buy property that is not connected to your own business.
You can borrow up to 50 per cent of the net value of your Sipp from a bank or a building society to help buy the property, and you can also buy a part of a property along with other investors.
The rules on residential property are more rigid, though. Currently, the only way you can hold it in your Sipp is if it's a house or a flat connected to a commercial property bought through it.
But in his budget announcement last week, chancellor George Osborne proposed a consultation into potentially allowing residential property to be bought through Sipps in a new way. It would be different from plans first aired in 2005 that would allow widespread residential property investment by Sipps, in that it suggests Sipps may only be involved in the process of converting commercial to residential property, rather than subsequent ownership.
Greg Kingston, head of marketing for Suffolk Life, does not believe this marks a return to the idea that residential property can be held within Sipps as a long-term investment. Instead, he says, it could allow pension funds to acquire commercial space and then develop or convert it to residential or other uses. And he added: "At that point it would be sensible for the Sipp to relinquish ownership."
Source: Investment Sense
Unregulated investments
If you are a high-net-worth investor (you have assets of over £100,000) it is possible to buy unregulated collective investment schemes (UCITs) through your Sipp. But these are not viable for the vast majority of Sipp holders. A Financial Services Authority (FSA) investigation revealed that 75 per cent of unregulated investments are actually detrimental to the portfolios of private investors - meaning the odds are clearly stacked against you if you're trying to make money from unregulated investments.
But not all of them are scams. As Investors Chronicle has previously reported, the vast majority are highly unsuitable for private investors because they are highly risky and have no guarantee of rewards, but some offer perfectly legitimate funding opportunities.
Bridging loans
Putting other people's mortgages in your Sipp doesn't sound very enticing. But doing so could earn you a 15 per cent yield. 'Bridging loans', which allow you to do just this, are new Sipp investments that have sprung up over the past year. But while the rewards can be huge, the risks are obvious. If people default on their mortgages, your pension suffers. For this reason, most Sipp providers won't touch them with a bargepole, although a growing number are opening up to the idea.
Unlisted shares
Are you an owner of a private UK trading business? If so, guess what you could do with your unlisted shares? That's right. They can go in your Sipp. They can work well with small holdings or for speculating in a company you are not in control of. If you're an employee of a larger company that is still unlisted that you hope to list in the future, it could also be a smart move as the increase in value would not be subject to capital gains tax (CGT) if held within the Sipp, unlike if you were holding it personally.
But not all unlisted shares are suitable for Sipps. If you and your connected parties own too much of the company it won't work out. This is because you are in control of the assets the company holds, which could lead to taxable property charges that would eventually burn a big hole in your pocket.
