So, you’ve decided to manage your own pension fund using a low-cost SIPP. Now what?
How do you create a sensible long-term portfolio that isn’t going to take up too much of your time but does provide reasonable prospects for capital growth without too much risk?
The traditional approach is to use actively managed funds, and this is the route taken by Tom McPhail in his Actively Managed Funds SIPP portfolio. But it’s a costly way of doing it, since the average annual fees charged by the funds he’s selected come to 1.66%, which is £497 a year on the sample portfolio of £30,000.
Check out our SIPP comparison tables
Low costs are a big advantage
My Tracker SIPP Portfolio uses simple low-cost tracker funds and has costs of just 0.52% or £157 a year, which means it can earn an annual return before charges of 1% less than McPhail’s portfolio and still stay level with it.
Apart from cost, the key point is that using tracker funds avoids the problem of picking good investment managers. So you are left with the ‘asset allocation’ decision - how much in each basket? - and while you might want to review this annually, if you’re under 40 you could probably stick with the same allocation for several years.
Order free information on saving for retirement
Investing for the long haul
The Tracker SIPP Portfolio is a long-term growth portfolio designed for someone with at least 20 years to ‘retirement’, defined here as the point at which they may want to start withdrawing income from their fund.
It therefore has 70% in shares, 10% in resources, 10% in property and 10% in fixed interest. You might want to start reducing the percentage in shares and resources at between 10 and five years from ‘retirement’.
The initial costs of buying the Tracker SIPP Portfolio through an online sharedealing account should be no more than £15 per trade or £210 in all and could be as low as £150.
The total annual cost of £157 (0.52% of £30,000) really is as cheap as chips bearing in mind that it gets you invested in everything from bonds to emerging markets, commercial property, energy and gold. In a low-cost SIPP you pay no annual management charge, so that £157 is the sum total of your annual costs.
Check out our SIPP comparison tables
The £30,000 Tracker SIPP Portfolio
| Asset class | Investment | Amount | Cost | % of total |
| Bonds | | £3,000 | | 10 |
| | i-shares £ Corporate Bond (SLXX) | £1,500 | 0.20% | |
| i-shares Euro Corporate Bond (IBCX) | £1,500 | 0.20% | |
| Property | | £3,000 | | 10 |
| i-shares FTSE EPRA/NAREIT UK Property (IUKP) | £1,500 | 0.40% | |
| i-shares FTSE/EPRA European Property (IPRP) | £1,500 | 0.40% | |
| Resources | | £3,000 | | 10 |
| ETF Energy (AIGE) | £2,000 | 0.49% | |
| ETF Gold (PHAU) | £1,000 | 0.39% | |
| Shares | | £21,000 | | 70 |
| db x-tracker FTSE All-Share Index (XASX) | £3,000 | 0.40% | |
| Lyxor ETF FTSE RAFI Europe | £2,000 | 0.75% | |
| i-shares DJ Euro Stoxx Small Cap (DJSC) | £3,000 | 0.40% | |
| Lyxor ETF FTSE RAFI US 1000 | £2,000 | 0.75% | |
| db x-trackers MSCI Japan (XMJP) | £2,000 | 0.50% | |
| db x-trackers MSCI Emerging markets (XMEM) | £3,000 | 0.70% | |
| db x-trackers MSCI Emerging Asia (XMAS) | £3,000 | 0.70% | |
| Lyxor ETF Private Equity (LPRV) | £3,000 | 0.70% | |
| Total | | £30,000 | 0.52% | |
Get information on Exchange Traded Funds at the LSE and ETF Securities
Under the bonnet
Exchange Traded Funds (ETFs) are funds issued in the form of shares traded on the London Stock Exchange (LSE). A bank - Barclays in the case of i-shares, Deutsche Bank in the case of db x-trackers, Societe Generale in the case of Lyxor - creates the fund, manages it and collects the management fee.
Essentially, the sponsor bank has to hold the relevant assets at all times to match investors’ ownership of units. The units are repriced minute-to-minute and can be bought and sold at any time in LSE trading hours. Exchange Traded Commodities (ETCs) are newer and give access to all sorts of commodities but operate on a similar basis. We’ve included gold and energy in this long-term portfolio.
Unlike shares, ETFs and ETCs do not suffer Stamp Duty at 0.5%, which is another small but useful saving for investors, worth £150 on a £30,000 portfolio.
Order free information on saving for retirement
Choosing sectors and funds
We can get most of the asset classes we want using ETFs. We can get investment grade UK and European corporate bonds to give us our basic stake in fixed interest. We can get both UK and European commercial property. We can get UK shares, US shares, European shares and emerging market shares.
We can get private equity, and could get a lot more specialist sectors I haven’t included like water and infrastructure. While the range of ETFs means we get good diversification, they are all based on listed companies, so in stock market downturns they are all likely to suffer.
But using ETCs means we can also get a physical stake in energy (oil and gas) and gold, without having to add the risk involved in investing in mining or oil exploration companies. Since the prices of these commodities don’t tend to move in line with share prices, they add a useful element of diversification to the portfolio.
Check out our SIPP comparison tables
Get a spread of investments
So the Tracker SIPP Portfolio provides a good spread of bonds, property, natural resources and shares, all for a fraction of the costs you would pay either buying funds or actively managing your own share portfolio.
The only swerves away from a conventional asset allocation in the Tracker SIPP Portfolio are that it includes a higher proportion of emerging markets and Japan. The emerging markets won’t be emerging in 20 years’ time - they will be mainstream, especially China, India, Russia and Brazil - so it’s appropriate to have 20% of the portfolio invested there.
As for Japan, it’s the cheapest of the world’s developed stock markets and after a miserable decade for investors it will with luck have a big catch-up in stock market terms over the next few years.
Order free information on saving for retirement
How important are cost savings?
Keeping down the annual costs of your portfolio will make a difference to your retirement pot. But quite how a big a difference will depend in how markets perform. To show why, I’ll take two scenarios: one in which investments grow at 7% a year for 15 years, and one in which they grow by 12% a year.
How costs affect investment returns
| | High-cost Plan | Low-cost Plan | High-cost Plan | Low-cost Plan |
| Gross annual return | 7% | 7% | 12% | 12% |
| Cost of management | 1.6% | 0.54% | 1.6% | 0.54% |
| Net annual return | 5.4% | 6.46% | 10.4% | 11.46% |
| Value of £30k portfolio after | | | | |
| Five years | £39,300 | £41,400 | £50,300 | £53,000 |
| Ten years | £51,400 | £57,100 | £84,500 | £93,800 |
| 15 years | £67,300 | £78,800 | £141,800 | £166,000 |
Real money is what counts
The difference between the payouts is the same in percentage terms: the low-cost plan delivers 5% more after 5 years, 11% more after 10 years and 17% more after 15 years whether the annual growth rate is 7% or 12%.
But real money is different from percentages. If you get a low rate of return of 7% for 15 years, you will be far happier to get an extra £11,500 from the low-cost plan than you will be if you end up with £24,200 extra thanks to a 12% growth rate. Obvious, really - if you only have a little, then having a bit more is worth more to you than if you already have a lot.
Since we have no way of knowing now whether returns will be high or low over any period in the future, it makes sense to have modest expectations, and this means cost savings really are worthwhile. And look at it another way: the high-cost plan managers will effectively take £24,200 of your money over 15 years (assuming a 12% return). Do they really deserve to collect such a big chunk of your money for their efforts?
Check out our SIPP comparison tables
Lots more ETFs
In addition to the ETFs listed on the LSE, there are hundreds more listed on US and European stock exchanges. While you may be able to buy these through an online sharedealing account, you may not be able to get full information on them. In any case, sponsors are likely to list a lot more of them on the LSE over the next year or two, giving you more scope to include other asset types in your portfolio.
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. We recommend 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.
