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Self-invested personal pensions can offer a lot more than many people realise

by David Burrows

A Sipp allows the investor to hold a whole host of different investment vehicles in one pension, from individual shares and unit trusts to contracts for difference (CFDs), hedge funds, offshore funds and structured products. But how much do Sipp holders take advantage of this choice and do these options really bring anything exciting to the table anyway?

For instance, is there any benefit in investing offshore other than the fact that some of the more esoteric funds do not have onshore equivalents? What of structured products and absolute return funds – are they an ideal option for a volatile market or the latest theme flogged by investment providers with little in the way of a performance record to back them up?

Test the structure

Many IFAs are less than convinced about the arguments in favour of structured products. Limiting the downside on an investment is all very well but the trade-off is that such products put a ceiling on the upside.

Graeme Mitchell, managing director of Galashiels-based IFA Lowland Financial, believes investors may have missed the boat if they are looking at structured products now. ‘It strikes me that the real selling point of these funds is they offer a degree of protection if an index takes a hammering but, given that the market has already plummeted, is there a strong argument for going into one of these vehicles now? I wouldn’t have thought so. I have yet to be convinced of the merits of structured products anyway, particularly in relation to charges.’

However, Gary Dale, head of intermediary sales at Investec Capital Markets, believes there is too blinkered a view of structured products and says Sipp investors should look at what is offered across the board rather than assume all products are much the same.

‘I think it is crucial to understand that risk is different from product to product,’ says Dale. ‘The whole issue of guarantees is misleading – some products do have special guarantees but others increase the upside and have no limit on the downside. For instance, there are plans that offer 170% of any upside on the FTSE, but there are no guarantees.

‘I don’t think it is a bad thing that there is a wide degree of choice out there to suit different risk profiles.’

Dale also disputes the claim that charges are excessive or that the best opportunity to invest in structured vehicles has passed. ‘Unlike hedge funds, there are no performance fees, the charges are transparent and there are no bid-offer spreads,’ he says.

‘As for being a suitable product at this moment in time, volatility is incredibly high and the market may be up and down for a long time. If you want to be in UK equities, buying the market is not the only place to be – you might be far better in a structured equity product. You can chase 20% to 25% per annum but you have to be in the market to make the return, but why not be in a geared fund?’

Aside from the merits or otherwise of structured products, Christine Hallet, chief executive at Pointon York Sipp Solutions, believes Sipp investors are starting to get the most out of their Sipps when it comes to using the asset classes available. ‘We have an open-plan framework with our Sipps, so clients are inclined to utilise all the Sipp options available to them, and many have no qualms about using some of the more esoteric ideas,’ she says. ‘They will have exposure to CFDs and hedge funds as well as unquoted shares.

‘Offshore funds used to have more appeal on tax grounds but less so now – it is more the case that some funds may only be available offshore.’

Property interest

What about property? Has the attraction of that asset class waned in the light of the credit crunch and pressures on the property market in the UK?

‘The whole point about Sipps’, argues Hallett ‘is that you are in a position to diversify a portfolio by investing in asset classes that are not correlated with each other. Sipp investors should always consider some exposure to property, the question is where.

‘At the moment we are seeing a lot of clients invest in aparthotels in Thailand, which they are doing via structured product vehicles [GDCVs – Genuinely Diverse Commercial Vehicles].

‘Commercial property has always been big in Sipps and that is still the case. We are actually seeing moves back into direct commercial property investment again. Investors are buying in the UK again as they see valuations go down but it is very selective.’

Sipp Solutions has seen a strong interest in the Palisade fund offered by the Chesterman Group, involving mezzanine finance for project development in the City.

‘Clients are using structured products quite frequently now,’ says Hallett. ‘There is a particular attraction where there is some element of guaranteed return. Several structured product providers now have five-year track records, which is a help too.

‘We have not really seen interest in absolute-return funds. They are not always as absolute as they make out – there is commercial property in some and frequently the “absolute” tag comes into question.

‘When you are looking at all alternative investments you have to ensure that they do what they say on the tin. The label may be similar but there may be enormous differences in terms of the level of guarantees – you really have to look at the underlying investment on its own merits.’

Hallett believes while investors have been bombarded with many alternative investments some are more appropriate than others, but in general she thinks the breadth of choice is positive. ‘Sipps are meant to be about getting exposure to markets in a diversified way, so looking at all options,’ she says. ‘The onus is then on getting the percentages right in terms of the risk profile of the client. It is better than just going into index trackers, which is what you might as well do via a personal pension if you are not going to take advantage of the versatility of Sipps.’

Broader outlook

James Daly at TD Waterhouse agrees investors are using alternative investments, but points out CFD activity is relatively muted. ‘I think since A-day [April 2006] investors have become far clearer with regards to what can and what cannot be put into a Sipp. The breadth of investment choices is now sinking in.’

Hallett suggests use of hedge funds is limited via the nature of the product. ‘We are seeing people put hedge funds in their Sipp but you have to be talking about quite a large Sipp because the minimum investment typically for a hedge fund is £100,000.

‘With a cheap and cheerful Sipp, providers will be more limiting on what they will allow you to invest in. For instance, insurance companies are not allowed to invest in unquoted shares.’

Daly agrees Sipp investors watch the bigger picture regarding what the new investment rules allow. ‘Undoubtedly investors are looking at things like unquoted shares but also they are increasingly aware of the option of putting short instruments in a Sipp.

‘Things like covered warrants or currency warrants have a certain appeal. With something like covered warrants, even most of the execution-only Sipps will cater for you. Also, Aim shares

are allowed and have attracted interest.’

There is also the benefit of using CFDs to hedge existing positions in a Sipp portfolio. An investor usually has the option to split the Sipp fund, so part is in a CFD Sipp and part is in a traditional portfolio. ‘From what we have seen so far there hasn’t been a huge appetite for CFDs in a Sipp,’ says Daly. ‘I think it is still a step too far for a lot of investors.’

Make the most of Sipps

Meanwhile, Helen Jenkins, managing director of Cardiff-based IFA Inspiration Wealth Management, is frustrated by clients not using Sipps effectively. ‘I think the flexibility of Sipps is great but I repeatedly see clients going into Sipps for that very reason but then not taking advantage of the investment choices open to them,’ she says.

‘If you don’t make use of the investment options in a Sipp then you are paying high charges for something that you are not using – in short it is an expensive way of running a personal pension.’

Jenkins adds, ‘I have clients who are sophisticated investors and who have taken out Sipps because they want to include commercial property in their pensions. They fail to include much in the way of property in their Sipp and they never once consider any other of the investment options open to them. The opportunity to diversify is there but too often it is just not taken.

‘My advice to Sipp investors is to make sure they use this pension facility as it is intended.’

Angus Branfield, director of private clients at City-based IFA Truestone, echoes much of Jenkins’s sentiments. ‘For a full-blown Sipp to work effectively you should look to use a broad spread of the asset classes available to you,’ he says. ‘You don’t have to use all of them but you should at least try and diversify the portfolio. If you don’t do this then you might as well be in a standard personal pension or a low-cost Sipp that limits what you can invest in.’

At The Share Centre, advice team manager Andy Parsons believes investors don’t always have access to the right advice. ‘A lot of people go into Sipps without fully understanding the investment options open to them,’ he says.

‘Those giving advice on investing in Sipps may not have the right experience or knowledge required to discuss alternative investment vehicles. For example, equities are not a specialism of your typical IFA. Investors should research their provider first before investing,’ he concludes.