Self Invested Personal Pensions – SIPPs
This article addresses the important issues of Asset Allocation – turning, recently, conventional thinking on its head. Many people with SIPPs are now considering increasing their exposure to Alternative, or esoteric, investments. Alternative Investments enable investors to access opportunities at a grass-roots level seldom found among mainstream investments. They may provide added diversification and higher returns to an investment portfolio and reduce the correlation of returns between investment classes. However, Alternative investments are generally less understood and sometimes miss-represented, resulting in both hidden opportunities and risks. But with the right expert guidance, financial intermediaries (and their clients), can identify genuine opportunities, understand and balance risk with reward and avoid mistakes.
Low returns from fixed income products and the rising cost of living mean pensioners can no longer shield themselves from risk if they want to live out their retirement comfortably.
Pressure on your pocket from all sides means the traditional shift towards lower-risk assets during middle-age makes less sense and effective asset allocation is even more crucial.There was a time when most advisers would tell you middle-age was the period during which you should be shifting away from risk to protect the capital your pension had accrued as you approached retirement, which might not have been that far away if you’d played your cards right.
Now four years of low growth, negligible returns on cash savings, the soaring cost of living, stagnant property prices and entirely new costs, such as university tuition fees and unemployed children who cannot afford to leave home, mean investors can no longer afford to slacken the pace and protect their capital.
“Middle-age was a different thing 10 years ago,” says Kerry Nelson, managing director at Nexus IFA. “People were aspiring to the idea of an early retirement – seriously expecting they could get out at 55 – and these days that’s really not feasible for the majority.”
“That age-group is being hammered from all sides and the nature of the environment they’re in means they cannot afford to de-risk at this stage.”
“If you move into bonds you’re pretty much looking at negative returns, the return on cash savings is negligible, you have to go up the risk ladder just to sustain your pot, never mind grow it.” This makes grim reading for off-the-peg pension investors, the majority of who will be in products that are doing exactly the opposite, throttling back their exposure to equities in the traditional manner. For investors who have a self invested personal pension (SIPP) or are looking to transfer their personal pension into a SIPP they control themselves, now is the time to think carefully about asset allocation.
Rob Gleeson, head of research at FE, said: “It’s a tough call, there’s quite a balancing act here. You’ve got about 20 years of savings you don’t want to fritter away, but still have a 15- or 20-year time horizon and the ability to make a real difference to your retirement by taking on extra risk.” “This is basically the only time that attitude to risk really matters – at all other times it’s pretty much overshadowed by time horizon and other situational factors.”
