Life of a pension saver part 3: bespoke investing
Not only are financial needs and aims unique to each individual, they also change throughout a person’s life.
As our circumstances change, so too do the products we require, the amount we have to invest and our attitude towards risk.
Pensions are usually long term savings vehicles, so they need to be able to accommodate such changes. As such, they are able to hold a huge variety of different investments.
This flexibility is written into the tax legislation governing pensions as a whole. However, different providers, or even different products available from the same provider, will have their own rules about allowable investments. For example, workplace pensions are likely to offer a very limited range of investment funds because they cater for a large range of investors, including those with little investment experience and no adviser.
Self-invested personal pensions (SIPPs) are designed to give investors greater choice and control over the investments held within their pension. Some, such as platform SIPPs, provide more variety than other types of personal pension while still limiting the investments in order to provide a simple, streamlined product. Traditional SIPPs, however, are usually designed to be as flexible as possible.
The need for flexibility
There are many reasons why someone might benefit from the flexibility offered by a traditional SIPP.
Some investors might be looking to spread risk as the value of their pension increases: this has been particularly prevalent in recent years. Many investors have sought to spread their investments between several financial institutions with an aim to reduce the risk of losing significant amounts of money should one of the firms fail. Many SIPPs can hold multiple investment accounts and hold assets directly through fund providers, meaning that investors can achieve this aim without the need to hold multiple pension products.
The ability to hold multiple accounts and direct investments also means that SIPPs usually offer access to different types of investments. They are also less likely than other pensions to restrict the number of assets that can be held. Combining these factors enable investors to create a diverse portfolio within the same pension product. Individuals may consider this increasingly important as they become more confident choosing investments. It could also benefit investors approaching retirement: diversifying a portfolio across different asset classes can help to protect a fund against short-term market fluctuations.
Other investors may want to take advantage of the more unusual investments permitted by HMRC. Commercial property is popular, with investors attracted by the prospect of their pension receiving rental payments and benefiting from any increase in the property’s value. Commercial property investments can be especially appealing to small business owners who own their business premises. Using their pension to purchase the property releases cash back into the business and removes the property from the owner’s estate for inheritance tax purposes. It can also help reduce the tax liability of the business, as rent paid to the SIPP can be treated as a deductible business expense.
Investors who cannot afford to buy a whole property may still be able to invest. Many providers can facilitate group ownership, where several SIPPs own a single property between them. Some providers allow a SIPP to own part of a property, with the rest owned privately by the investor or another individual. It is also possible for SIPPs to borrow money – up to 50% of the SIPP’s net value – in order to purchase a property.
There have been significant changes to pensions in the past few years, with more changes still on the horizon. It has never been more important for individuals to be able to save towards retirement in ways that suit their needs. As traditional SIPPs can usually hold most investments allowed by HMRC and rarely restrict the number of assets or investment accounts, they are flexible enough to meet the needs of many different investors.
Jessica List is a pensions analyst at Suffolk Life