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Those who squirrel money away for their twilight years may be getting a little twitchy in the face of such a turbulent economy. Chris Bourke looks at the state of play for the long-term investor

Planning for retirement can be a daunting task, especially now that muted house price growth has muddied the hopes of those counting on their homes to pay for their golden years. With the added nasty of a turbulent stock market in thrall to a teetering global economy, the underside of the mattress looks more appealing by the day.

Once the preserve of the wealthy, Self Invested Personal Pensions (SIPPs) have become one of the most popular choices for UK private investors wanting to take a proactive role in the management of their pension scheme. Billions of pounds have poured into SIPPs since 2006, and continue to, after falling charges coupled with new pension legislation opened the market up to the masses.

But two years on, we inhabit a very different world. Havoc reigns in the financial universe as the world’s credit markets continue to unravel with no private or professional investor immune to the fallout. However, any SIPP investor prone to bouts of panic selling may find doing so difficult – because you cannot withdraw any cash from your SIPP until you are 50, and from 2010 that age will be upped to 55.

That, however, is what long-term investing is all about. SIPP holders are in for the long haul and must learn to live with volatile markets or adjust their portfolios accordingly.

‘SIPPs are a pension scheme, so by their very nature are to provide income in retirement,’ says Christine Hallett, chief executive of Pointon York SIPP Solutions. Yet volatile markets are also opening doors to investors.

‘While recent turbulence may have unsettled some, for those SIPP holders with a long-term outlook the present market is creating opportunities,’ says Anthony Scott, director of private clients at Charles Stanley. ‘Markets will always have a tendency to overreact and it is important that these are used as opportunities to adjust portfolios. Any portfolio should have the capacity to add to holdings when times are difficult and conversely should ensure that profits are taken when times are good. A well-structured portfolio will contain both elements simultaneously.’

Charles Stanley, the UK stockbroking firm, offers two SIPPs; one in which standard investments are held and one that holds alternative investments which can include hedge funds, options and, in some circumstances, unquoted shares.

Protecting your nest egg

While Scott believes that this year could be an opportune time for some SIPP holders to re-evaluate their holdings, he also urges a healthy dose of caution when doing so. ‘In looking at asset classes and geographies on a long-term view, an investor should be conscious of the overall risks involved. The BRIC (Brazil, Russia, India and China) economies are showing a great deal of promise, but all come with a certain amount of political risk. The Far East (excluding Japan for now) will continue to do well, but also believe that a good deal of this looks to be overpriced at present.

‘One particular sector worth looking at right now is soft commodities, which have started to hit the news. With increasing wealth in China and India, the price pressure on staples such as corn and wheat will continue.’

Georgina Mitchell from stockbroker Redmayne Bentley, however, notes that news sensitive asset classes such as commodities are not to all investors’ taste. She says: ‘A well-constructed portfolio should have exposure to different asset classes, and as someone nears retirement they may prefer to “lifestyle” the fund by moving it into less volatile assets such as gilts and bonds, and away from the more volatile assets such as commodities.’

Redmayne-Bentley’s SIPP is typical of most in that it allows clients to hold a wide range of investments that include fully listed and Aim shares, investment trusts, unit trusts, exchange traded funds, exchange traded commodities, gilts, bonds, options and covered warrants.

Along similar lines, Pointon York’s Hallett, believes that investors need to access the market cycles. ‘All asset classes have cycles and therefore it is impossible to pick one particular asset class as looking the best on a long-term view. The key is ensure the asset allocation and mix of geographies match the individual’s situation from an attitude towards risk, their age, and their particular circumstances.’

The sheer range of investments on offer makes it relatively easy for SIPP holders to keep their portfolios in tune with market cycles. Mitchell recommends various options for long-term SIPP holders seeking to do so, including putting the fund into cash, switching it to a more defensive stance, or moving into alternative investments such as absolute return funds or hedge funds.

‘There are many ways to reduce risk including diversification and careful asset allocation. Investment and unit trusts are also a useful tool for getting access to the higher risk areas such as smaller companies or overseas markets. If the member is simply looking for management experience this can also be achieved by using an advisory or discretionary portfolio manager.’

Knowledge is key

Investment trusts can be a useful way of getting access to good managers in specific sectors or areas, while also achieving diversification within that sector. However, it is important that a SIPP holder seeking to invest in such vehicles knows their own limitations in terms of what they, or their broker, is able to follow. For those areas that investors may feel they want some exposure to, but do not have specific expertise in, they should then look for managers with a proven understanding of their sectors.

‘Investors should not put anything in their SIPPs just to get management experience,’ says Pointon York’s Hallett. ‘The SIPP is a powerful framework for individuals to maximise their returns, but the investment decisions, whether they be the individual’s own or through their adviser, need to be appropriate and well thought through.’

Scott from Charles Stanley says: ‘Investment trusts should be purchased when they are trading at reasonable discounts, as many are at present, with a view to switching into a similar fund should they start to trade at a premium. Funds and investment trusts will only offer diversification within their specific area, so an investor should have an understanding of how this fits into their overall risk criteria and balances with the rest of their portfolio.’

It could be a time consuming task to diversify your SIPP portfolio every time the market lurches, especially in these volatile times. However, that process becomes a great deal easier when you can manage your portfolio online. The internet broker Sippdeal (www.sippdeal.co.uk) has created an ‘e-sipp’, which it says is the UK’s first online SIPP. It allows clients to buy and sell investments as they wish, as well as obtaining a real-time valuation of their pension fund.

The e-sipp also provides access to around 1,900 unit trusts and Open Ended Investment Companies (OEICs), which Sippdeal claims is a bigger offering than any other UK fund supermarket. Clients are able to deal in most of the unit trusts and OEICs online, with the rest available via telephone dealing at no extra cost.

Fergus Lyons, commercial director at Sippdeal, says: ‘In addition, we have negotiated additional discounts with most of the leading fund managers, this increasing the number of units purchased. In excess of 900 funds have no initial charge, while more than 1,600 funds have an initial charge of 0.5% or less.

‘Our SIPP wrapper is suited to any investor who may want to manage their own investments, or have any adviser do this for them. The wrapper never needs to change but the assets classes within the SIPP can change in line with changes to the clients attitude to risk, or indeed market volatility. The client is in control and will be the one who chooses which asset classes and specific assets to invest in. For example, as clients get older, they may wish to use more bonds in their portfolio.’

Weathering the storm

As well as seeking to diversify, share broker TD Waterhouse argues that SIPP holders should perhaps change their attitude, in order to weather volatile markets. James Daly says that investors should take a longer-term view of their portfolio, so that short-term cyclical movements become less relevant. He also said that SIPP holders wary of volatility could take advantage of ‘pound/cost averaging’ by investing a fixed amount of money in a particular investment on a regular, usually monthly, basis.

Daly also says that shorter-term investors should not steer clear of SIPPs just because of their long-term nature. ‘While in most cases a SIPP will be run for a long period, there is no real reason why investments should be long term. The TD Waterhouse SIPP can appeal to active traders and long-term investors that prefer to review their investments periodically or “fit and forget”, and we do see a real mix of both.’

Redmayne’s Mitchell agrees: ‘If investors have the time and resources to manage their fund on more of a short-term trading basis, then provided they are happy to take that risk with their retirement funds, then there is no reason why a SIPP should not be suited to a short-term investor.’

‘However, if somebody believes they will put their SIPP on the “back burner” then they would logically look for a low-maintenance investment,’ adds Daly.

TD Waterhouse fees are charged biannually each June and December at 0.25% of the value of the SIPP, subject to a minimum of £40 and maximum of £100 during each charging period, equating to a total annual fee of 0.5%. The firm also said it was currently waiving the initial set up fee of £80 on new SIPPs until further notice.

SIPPs can also be useful for those nearing retirement as a way of making their pension pot more tax efficient. If an investor finds themselves with excess funds in the present tax year, they can pay a contribution into their SIPP. The basic rate of tax (22%) is then reclaimed by the SIPP provider, and is added to the sum within that SIPP. Assuming that the investor is a higher rate tax payer, a further tax of 18% can then be reclaimed by the investor.

Anthony Scott at Charles Stanley says: ‘Many clients approaching retirement use SIPPs to consolidate a number of pension arrangements they might have, so that their pension is paid from one accumulated fund. However, even this can be long term, as a 60-year old client may not choose to buy an annuity until much later.

‘With the change in pension legislation two years ago, the client can, in effect, be paid indefinitely from the SIPP without ever having to liquidate the investment portfolio (apart from on the death of the member and their financial dependant) but merely managing the income needs of the client.’