Quantcast
Menu
Save, make, understand money

Getting Started

Investing for your Sipp: Where to start

Cherry Reynard
Written By:
Cherry Reynard
Posted:
Updated:
10/12/2014

It’s tempting to treat your Sipp as in the same way as all your other investments – a punt on technology here, a ‘safe as houses’ blue-chip there.

However, pension planning has a number of important differences over day-to-day investment. First, it usually has a longer time horizon – those starting retirement saving in their thirties and forties might have twenty-plus years to invest. It may also need to change over time – for example, you may need to incorporate lower risk assets, such as bonds, as you get nearer to retirement. Also, you won’t need to take an income from it in the early years.

The key rule with your Sipp is not to meddle with it: investors should get the investments right up front and then leave well alone. Done well, the investments in your Sipp should protect your money against the effects of inflation and give you a stronger return, compounded over time.

Deciding on the right investment

The first thing to do is decide how much risk you are willing to take. As you have a long time horizon, you can afford to ride out the market volatility. This opens up higher risk investment areas such as smaller companies and emerging markets. However, the right investment will depend on your own personal situation and how much risk you are able and willing to take.

In normal conditions the risk scale would broadly run – from low to high – developed market government bonds, corporate bonds, property, high-yield bonds, developed market shares, emerging market shares and finally commodities. However, investors must also take account of market conditions. Every asset class has a cycle and it is best to try and buy when an asset is cheap and avoid it when it is expensive. A good example would be the technology boom that ended in early 2000. If you had bought at the top of the market, you would have lost a lot of money but, if you had invested just a few months later, you would since have done very well.

Two things that matter more for pension investments

Inflation – If you are investing for a year, a 1-2% drag on the purchasing power of your investments probably won’t matter very much. 1% less of a tin of beans or a packet of tea probably won’t make a significant different to your living standards. However, over 20 years, inflation will make a real difference to your funds. So make sure that your investment offers some measure of inflation protection. Cash will not work in the long term with interest rates at their current levels.

Costs – Any form of saving or investment costs money. It can be tempting to dismiss the odd £10 dealing cost here or there as not mattering very much but that would be to neglect the potential effect of compounding growth. As an example, if you invest £250 a month for five years with an average return of 5% a year, without costs your final pot would be worth £17,073. If you spend £10 a month in costs, however, that sum would drop to £16,342 while, if you spend £20 a month, it will drop to £15,661. The effect is greater the longer you invest.

And one thing that doesn’t….

Income – in general, your income generating assets – equity income or bond funds, for example, are better housed in your Isa in the first instance, where all income generated is tax-free.

Where to start:

For the novice Sipp investor, the best option is usually a one-stop-shop, blended portfolio, where someone else does the heavy lifting of selecting different assets (equities, bonds etc) and picking the right stocks or bonds. This might include:

– A mixed asset fund – these combine fixed income and stock market investments to create a balanced portfolio, usually with a small income attached. They can be found in the IMA Mixed Investment sectors.

– A multi-manager fund – for these funds, an expert selects the best funds and builds a portfolio. Investors instantly gain access to 20-30 funds. They can choose a fund to be as high or low risk as they want. The most popular groups are F&C Investments and Jupiter and their best-selling funds are often their Distribution funds.

Model portfolios – These are offered by the various platforms and allow you to select your risk parameters, how much you want to spend and will then give you a suggested range of funds. These will have been selected by experts and will offer a blend of UK and international stocks and bonds.

For more information see our free guide on SIPPs.

 ym