Ihave decided to consolidate a collection of pension arrangements into a self-invested personal pension. Everything I have read in the last few years suggests that the smart money is on Sipps taking over from poorly performing, high-cost insured arrangements. I now need to make some investment decisions. I am 44 and aim to retire at 60. Help.
Sipps have indeed become very popular and will continue to be so because of the triple benefits of choice, control and clarity. Many people like yourself have consolidated disparate pension arrangements into a Sipp to gain a better understanding of their pension plans in addition to a wider choice of investments. They have also determined that the opaque nature of the charges of some conventional pension products are no longer acceptable to them.
What steps should you now take to determine a suitable investment strategy for the next 17 years?
How much appetite do you have for investment risk and volatility? How do you feel about the fact that some investments can go down in value as well as up? If you saw the value of your Sipp fund fall by 20 per cent or more, how would you react? What level of understanding do you have about the investment world? Lots of questions to which your answers are likely to help determine a suitable investment approach.
It is important to ensure that you identify the degree of risk that is applied to your Sipp fund. Discuss with your adviser the degree of risk you will be prepared to tolerate. To see your Sipp capital grow in value, you may well need to expose your pension fund to some risk, perhaps by investing some of your pension fund in shares.
How much you invest in shares is very much a personal decision. It makes sense to have some exposure to shares in international companies as well as fixed-interest securities and commercial property funds. This mixture of investment asset classes is important as it is generally accepted that having the right mix is probably more important than the individual stocks or collectives that are selected.
You might want to keep some of your fund in cash, partly to pay any fees that become due and partly to take advantage of investment opportunities as they arise. Remember the old adage that you should not keep all your eggs in one basket.
Spread the risk of investing by using a unit trust, Oeic or investment trust. You can also choose a range of collective funds to diversify your investments further. You can use collective funds in respect of your holdings in fixed-interest securities and commercial property.
You can buy them directly from the investment fund manager if you wish but you may be able to obtain them at a substantial discount if you buy them through an authorised and regulated intermediary. They may also be able to help you select the most appropriate collective investment funds but expect to have to pay a fee or have the discount reduced by the payment of commission. If you are asked to pay fund-based renewal commission, you should ask what ongoing service you will receive. At the very least, you should expect quarterly valuations and a yearly formal review.
If you do not want to make all the investment decisions yourself, you might use the services of a stockbroker or discretionary fund manager. These types of investment manager will design a bespoke set of investments for you or offer a well thought-out investment strategy.
Whichever route you choose, you should ensure that you review performance on a regular basis. At least a yearly review makes sense, with an examination of the investment funds measured against selected benchmark returns and also against inflation so that you can measure the real return of your investment funds.
It is always nice to know that your Sipp fund has grown in value but more precise measurements of performance will help to inform you about future investment strategy.
Nick Bamford is managing director of Informed Choice.