If you have a pension fund with a former employer, check out what’s happening to it. Maybe you could do a better job of managing it yourself.
Many people have large chunks of money in pension funds run by former employers. But over the past few years there’s been a huge boom in SIPPs (Self Invested Personal Pensions) as thousands of people have decided to move employee pension scheme money into plans where they control the investments.
Should you consider taking the plunge? If so, you can use a low-cost plan to buy a set of top-quality investment funds selected from our Best Buy tables. First, let’s deal with the issue of the old pension schemes the money is invested in. These schemes are either Final Salary (Defined Benefit) or Money Purchase (Defined Contribution).
Use our independent best buy table to compare SIPPs
Beware of ‘funny money’ offers from final salary schemes
If you have money in a final salary scheme, you need to think very carefully before you move it, because the lump sum you are offered by the scheme be may be much lower than is needed to buy the promised benefits.
The rules about valuing such pension rights give pension schemes the right to offer low values to people who take their money away, in order to ensure that those who stick it out to retirement do get their promised benefits.
You should pay to get an independent valuation of any ‘transfer out’ from a final salary scheme, especially since the regulators have twice issued warnings that some pension schemes have been offering inducements to people to leave. They suspect that those inducements represent very modest sweeteners on top of a poor basic deal.
Few people can assess the whether a lump sum transfer value of £X is good or bad value in relation to a promised benefit of a pension of £Y in 20 years’ time, but many will take it if they’re offered an extra few thousand cash-in-hand. Don’t.
Arrange a free SIPP consultation with an IFA here
Five benefits from switching to a SIPP
Most people, though, have built up benefits in Money Purchase schemes. These are much simpler and are just personalised pots of retirement money.
There’s usually no penalty for switching the money from a Money Purchase scheme to a different pension scheme. It’s this kind of switching that is driving a surge in the number of SIPPs.
So why consider the switch?
1. Switching is often cheap or free
2. You will have control of your pension fund
3. You will be able to decide when to start drawing income from it in retirement - though you must start to draw benefits before age 75
4. You can design a set of investments that suits your timescale to retirement
5. You can continue to hold investments and draw income from them when you retire, instead of having a fixed annuity income
Choosing and investing in your SIPP
I recently covered the cost issues in managing a SIPP- read more here. Once you have set up your SIPP you are now your own pension fund manager. What are you going to do with the money? Obviously you want to make as much as you can by the time you retire, but you also don’t want to risk losing it all.
My SIPP portfolio is designed for people with 15 years or more to ‘retirement’, by which I mean a date at which they plan to start drawing in come from their fund. I recommend that about five years before you start drawing income, you start to adjust the portfolio, and progressively switch into investments that generate a higher income, though I do not go along with the current fashion for putting a lot into fixed interest investments at retirement.
Some people may want to wheel and deal in shares inside their SIPP - I do so with mine, but that’s mainly because I have another pension plan that’s invested in funds. But most people will probably want to use investment funds, and indeed unless you have a lot of capital, this makes sense since it allows you to get a wider spread of investments, which ought to mean less risk.
| Asset class | Investment Amount | % of total |
| Cash Deposit account/Mini cash ISA | £3,000 | 15 |
| Fixed Rate | £2,000 | 10 |
| Aegon Global Bond | £2,000 | 10 |
| Property | £2,000 | 10 |
| Standard Life Select Property | £2,000 | 10 |
| Equities | £11,000 | 55 |
| Jupiter Income | £2,000 | 10 |
| Rathbone Income | £2,000 | 10 |
| AXA Framlington UK Smaller Co’s | £2,000 | 10 |
| Jupiter Financial Opportunities | £1000 | 5 |
| M&G Global Basics | £1,000 | 5 |
| AXA Framlington Japan | £1,000 | 5 |
| Artemis European Growth | £1,000 | 5 |
| Aberdeen Asia Pacific | £1,000 | 5 |
| Other | £2,000 | 5 |
| Gartmore Cautious Managed | £2,000 | 10 |
| Total | £20,000 | 100 |
Hold some cash back for investment elsewhere
This model SIPP portfolio has most of its money, 60%, in shares, with 10% in property and 15% in fixed interest. It also has 15% in cash. I don’t think cash is going to be a good investment on a 15-year view, and it’s not intended that the cash should stay there for 15 years.
But realistically, we are at a high point in commercial property prices and many other markets have also risen strongly in the past three years. At some point in the next five years, it’s likely that one or other of the world’s stock markets will offer a great buying opportunity - so I believe it make sense to keep some cash available.
The portfolio follows our usual guidelines in combining both asset allocation and investment style to manage risk.
A closer look at my recommended funds
Aegon Global Bond: At one point last year, the average fund in this sector was down 4%, but David Roberts and his team kept Aegon in the black. Over three years the fund has made 20% against a sector average of just 7%. Fixed interest is not an exciting sector but if there is a bloodbath in world stock markets this fund will hold its value.
Standard Life Investment Select Property: I explained recently why I’m no longer that keen on UK commercial property. But Standard Life’s strong investment team has produced excellent early results for this worldwide-investing fund and I expect it to be a steady performer.
Jupiter Income and Rathbone Income: These are both UK Equity Income funds - see my latest review of the sector.
The managers have different styles, and Tony Nutt at Jupiter will probably do better in sticky markets while Carl Stick at Rathbone will probably make more hay when the sun shines. Both, though, will deliver a steady rise in dividends from holdings mainly in large companies, so both are at the safer end of the share-investing risk spectrum.
AXA Framlington UK Smaller Companies: This is a riskier fund with a pure growth orientation. In the long run, I expect it to produce higher returns than the UK Equity Income funds, but with far more volatility. In the past, there have been periods of 5 years or more in which smaller companies languished, and this could happen again, but if you have a 15-year timescale you can afford to take that risk if it also brings the prospect of bigger returns.
Take a look at my other Model Portfolios for investors
The five overseas investing funds are even riskier
M&G Global Basics: This fund invests in resources, mining, oil exploration. On a 15-year view I find it hard to see how it won’t make a lot of money, but it could be a rollercoaster ride.
If the world economy grows, financial services grow even faster, and Jupiter Financial Opportunities should grow faster still since Philip Gibbs is adept at spotting profitable trends in the money world. Again, the price for higher returns is higher volatility.
Two world markets I believe merit a long-term investment: Europe and Asia. Europe, because the single market project will go on producing great business opportunities for established businesses; Asia for the China factor. Japan is a buy now simply because its market is too cheap, and may become a sell in two to three years’ time.
Balancing these sex-and-violence funds is a cup of hot chocolate: Gartmore Cautious Managed. Chris Burvill is a safe pair of hands who swings the fund between 40-60 and 60-40, shares-fixed interest.
As of now he has 50% in shares, 40% in fixed interest and 10% in cash.
I’m expecting him to time the swings between shares and fixed interest well enough to generate returns almost as good as shares but with less risk. And if you are of a nervous disposition, then I recommend you cut out the investments in M&G Global Basics and Jupiter Financial Opportunities and double your investment in Gartmore Cautious Managed.
Review performance regularly
There is no point in setting up to manage your own pension fund unless you take it seriously. That means a proper review every six months in which you compare the fund with its peer group and question whether the reasons for holding it are still valid.
And in particular, given the large amount of cash in this portfolio, you should also be asking: Is there a great buying opportunity out there?
If your timescale to retirement is shorter than ten years you should probably increase the amount invested in lower-risk funds.
Take a look at my other Model Portfolios for investors
Important Notice and Risk Warning
The EveryInvestor model portfolios are for general guidance only and do not constitute a recommendation for any investor. EveryInvestor does not provide individual investment advice. Your own personal circumstances and tax position must be taken into account in selecting investments.
EveryInvestor recommends that you obtain advice from an independent financial adviser before making investment decisions. The value of your investment and the income from it can go down as well as up and you may not get back a significant proportion of your investment. Past performance is not an indication of future performance.
