Although the Inland Revenue restricts the types of investments available to self-investment personal pensions, holders can still choose from a wide variety when building up a pension fund. The range of investments which can be sheltered within a Sipp is so wide that it includes some fairly exotic investments.
Once investors choose a Sipp, the key attraction is that they retain control of their investment programme. This implies that they have come to terms with taking full responsibility for the eventual success – or otherwise – of their retirement planning although they may from time to time invite others to carry out work on their behalf.
A good example of this is the transfer of some of the fund to a particular unit trust manager with the constant caveat that the money will be recalled if performance is unsatisfactory.
This urge to control, coupled with the vast array of investment opportunities available to Sipp holders, causes the composition of individual funds to exhibit quite different characteristics. This is all down to the preferences of particular owners.
Investments in local quoted companies may be more attractive than distant corporations that the holder only reads about in the financial press.
There has been much debate as to whether employees should risk some of their pension assets in the companies for which they work. Of course, care must be taken and the old maxim regarding investment spread must be strenuously observed. However, without transgressing the insider trading rules, employees are likely to be in a good position to vet the progress of the employer on a long-term basis.
Some of the more exotic investments that can be held within Sipps include New Zealand forestry and Brazilian equities, as well as guest houses in the Lake District.
In fact, you could compile a Sipp portfolio made up entirely of overseas investments providing that the equities are traded on a recognised stock exchange. For a list of such stock exchanges, visit the Inland Revenue website at www.inland revenue.gov.uk/fid/res.htm.
There are a wide range of investment options, each offering different degrees of risk, so successful investment will depend to a large extent on the understanding of the degree of risk inherent in each of the asset classes. Even though we all know that investors should not put all their eggs in one basket, many planholders make the mistake of investing too heavily in one type of investment to the detriment of the overall portfolio.
One of the great features of the Sipp framework is that it allows investment in a wide range of assets but still we see individuals get enticed into supposedly low-cost arrangements that only allow specific asset classes. Take the classic stockbroker Sipp, for example.
Contracts for difference are currently the sexy choice for some Sipp holders but are very high risk.
There are two reasons why individuals might concentrate on particular asset classes and these are ignorance and greed. When we are young, we can be forgiven for the first but we have only ourselves to blame if we are greedy. Either way, ignorance and greed can have a devastating effect on our investments and income in retirement.
So how can we avoid these two characteristics and stay close to the path of common sense and successful investment? Ignorance can be avoided by choosing a good financial adviser who will steer us towards the type of investments which should meet our financial goals.
As for greed, how often have you acted on a share tip given to you by a complete stranger in a bar? Such unsolicited tips can be dangerous as they may well be part of a share ramping operation and they rarely lead to the punter seeing any profit.
Once we understand investment risk, however, it is possible to manage it effectively.
Remember, the homily “Act in haste, repent at leisure” it is as true today as it has ever been.
Christine Hallett is managing director at Pointon York Sipp Solutions