How to invest in a SIPP?

Wibble

I'm now on the verge of setting up a SIPP, but as it's still new territory for me I thought I'd describe what I intend to do to see if you agree that it makes sense to do it this way and to ask for advice on some things.

Currently I'm 34 and haven't been contributing to a pension for the last 7 years. I had one in my previous job for 7 years and am currently planning on leaving that for the moment - once I get my SIPP up and running and understand how things work better I'll look and see if it's worth transferring, but for now I'm working out my pension plan as if I have nothing with that as a bonus, as it won't be a particularly large amount anyway.

So, I'm currently a high earner having bulit up an Internet business. I made a 6-figure profit last financial year and expect to just about do that this financial year. In future years I've no idea as business can fluctuate dramatically.

So, I need to kick start a pension and I thought now was as good a time as any. My plan is to put around 20k cash into a Hargreaves Lansdown SIPP as a lump sum. That's within the 17.5% limit I'm allowed to put in before the rules change.

Then going forward I want to put 2k/month into the pension. If business drops then I'd want to decrease contributions. If it continues to do well or better I'd like to add extra lump sums every so often. But for now I'm just assuming I put 2k/month in.

While I'm planning on putting a 20k lump sum in before April to use up some of this year's 40% tax and to use it as a deadline to get me to actually do it, I don't want to put it all into the market immediately as I want to spread the investment. So what I'd probably plan on doing is investing 1/12 of it every month for a year with my 2k monthly contribution.

As to what to invest in, I thought that I'd probably put 100% into units. I've not narrowed it down yet to which units, but I'd plan on doing some research at sites like BestInvest's to help pick ones that hopefully ought to be good.

I'd want to spread the units over a variety of areas. E.g. a good percentage in UK equities, some in Japan, Europe, Emerging markets, maybe America, etc.


So, I have a few questions:


1) How many unit trusts should I think of investing in so as to be able to spread the risk but not to get bogged down in monitoring them all? 8-10, or is that a lot or too few? Or should I start with less and add more when the fund grows bigger?

2) If I do buy 8-10 units and just add to them each month, plus I have up to 20k initially in cash in the SIPP earning tax free interest on untaxed money - does a Hargreaves Lansdown SIPP make sense for me? I don't mean is there another that's slightly cheaper or slightly different, I mean given my fund will start so low is this the best way for me to be beginning my pension? I understand that other personal pensions may be a bit cheaper overall, but does the extra choice of Units I'd get enable me to get a better return and so make it worthwhile? I'd read that SIPPs were best for pension pots over 100k, but as I'd be managing my own in a cheap SIPP should it still make sense for me?

3) Is investing 100% in units sensible, or should I also have other investments in there. There's 20 years to go before retirement so I can go for growth, but then my high earnings may only last a couple of years so it might only be for 2 or 3 that I can contribute this much. If I should go for other investments, what do you recommend and what percentage should I consider?

4) Rather than asking for advice on which units to go for, do you have any advice on what areas are best? I'd expect a spread over many areas, but some might be expected to perform better over the next year or two and so I might want a higher percentage invested in them. E.g. I've heard that the mid-caps have done well in the last year and so FTSE100 and smaller growth shares are looking better investments now. Also, Japan's done well so it may not be a good idea to put too much in now, whereas Europe looks like it could be its turn to do better. So any advice on what areas are looking good and how you think it'd be wise to spread a portfolio of shares (e.g. 50% in UK equities, mainly in FTSE100 and smaller growth shares, 10% in Japan, etc) would be gratefully received. I'll still do my own research, but examples of what you think or are actually doing would be helpful.

5) What websites do you recommend for researching specific funds and for informed comment on how the various World markets are doing and are expected to do?


Sorry, that's a lot to ask - I got carried away!

Thanks in advance for your help! :T

dunstonh

1) How many unit trusts should I think of investing in so as to be able to spread the risk but not to get bogged down in monitoring them all? 8-10, or is that a lot or too few? Or should I start with less and add more when the fund grows bigger?

10-15 increasing as your investments increase.

2) If I do buy 8-10 units and just add to them each month, plus I have up to 20k initially in cash in the SIPP earning tax free interest on untaxed money - does a Hargreaves Lansdown SIPP make sense for me?

Its suitable for your goals. However, a hybrid SIPP would likely be cheaper (no charges on wrapper). Problem is that they are not coming in until after A day when the rules allow them to exist.

I understand that other personal pensions may be a bit cheaper overall, but does the extra choice of Units I'd get enable me to get a better return and so make it worthwhile?

Personal pension providers on comparable terms to a discounted SIPP could be cheaper and although they wont have 500-1000 funds available, many have 50-300 funds. Most of the highly regarded funds are there to be selected within the PP wrapper.

I'd read that SIPPs were best for pension pots over 100k, but as I'd be managing my own in a cheap SIPP should it still make sense for me?

Its closer to 30k nowadays but there are SIPP providers who give better terms when you have values above 100k and 250k.

3) Is investing 100% in units sensible, or should I also have other investments in there.

Its a matter of personal preference. No right or wrong here. More of an issue of your personal attitude to risk and how the other investments would fit in with your portfolio.

Rather than asking for advice on which units to go for, do you have any advice on what areas are best?

All of them are.

I'd expect a spread over many areas, but some might be expected to perform better over the next year or two and so I might want a higher percentage invested in them. E.g. I've heard that the mid-caps have done well in the last year and so FTSE100 and smaller growth shares are looking better investments now.

Are you really going to be monitoring it that closely that you can afford to invest with that sort of micro management? I also disagree with what you have heard.

Also, Japan's done well so it may not be a good idea to put too much in now,

why?

whereas Europe looks like it could be its turn to do better

why?

e.g. 50% in UK equities, mainly in FTSE100 and smaller growth shares, 10% in Japan, etc

Pretty awful mix there.

I don't want to rain on your parade too much but you seem to be focussing on short term issues and acting as if you will be switching on a monthly basis between the funds. This is a pension investment and you are buying for the long term. Sure, don't be lazy but also dont look at short term issues as to what you think may or may not happen. Based on what you have said above, I would guess you would be wrong on some of the counts and right on a few.

As for portfolio spread, you should invest in a wide range of areas that average out to match your personal risk profile. Not mine or anyone elses on this board. You have no limit to the funds you can invest in and with the smallest amount in any fund being £100 (subject to provider), there is really no limit on the options you can have. Wider the better.

cheerfulcat

Hi, Wibble,

Wibble wrote:

1) How many unit trusts should I think of investing in so as to be able to spread the risk but not to get bogged down in monitoring them all? 8-10, or is that a lot or too few? Or should I start with less and add more when the fund grows bigger?

You can add more when you are more confident. 8-10 is a fair spread to start with.

2) Regarding the broker - to be honest I'd have to say, suck it and see. Until you know what your pattern of investing is going to be, and until you have used the HL service for a while, it is impossible to say what would be best for you.

3) Is investing 100% in units sensible, or should I also have other investments in there.

If you mean funds, yes, that's OK as long as they are well diversified.

4) Rather than asking for advice on which units to go for, do you have any advice on what areas are best? [...] I'll still do my own research, but examples of what you think or are actually doing would be helpful.

I think that Eastern Europe has a long way to go. China, India, commodities are going to be important too, IMHO. FWIW I have nearly 20% of my portfolio in commodities. But I think that the most important thing is to have balance. As dh says, this is a long term proposition; what matters is not what is going to happen next month or next year, but over the next 20 years.

You might like to look at ETFs. Yes, I know, they're trackers and some people don't like trackers but they are very useful for tracking specific sectors and indices.

5) What websites do you recommend for researching specific funds and for informed comment on how the various World markets are doing and are expected to do?

For research, there's Trustnet, Morningstar, iii.

For informed comment it would be hard to beat the Motley Fool. Not so much the editorial content, though the " how-to" investing articles are worth reading, but the discussion boards are excellent.

Wibble

Hi, thanks for the replies - they've very helpful!

About Hybrid SIPPs having no charge on the wrapper - the HL SIPP says it's free to set up and deal in funds. Also there's no annual charge for holding cash or funds that pay them renewal commission. Are there other charges that HL charges that hybrid SIPPs wouldn't?

As for where I'd invest - I would plan on covering all the main areas, it's just a matter of what percentage goes where. I'd not want to micro manage investments, just that every year I might want to reevaluate how the funds are allocated and if one market's not doing as well as another I might want to reduce the holding in it, though that might just be to reduce it from 10% to 8% of my holding and not selling the lot.

I do know what you mean about it being a long term investment, though. The dealing I've done has been in individual stocks and so perhaps I do think about them with more of a short term view than I ought to.

I have found an interesting page here:

http://www.bestinvest.co.uk/planning/portplan/index.htm

That's got a table in it that gives some idea of how to spread your asset allocation depending on risk profile.


Yes - I was meaning 100% in funds and not specific shares. They'd be widely spread, too.

Funnily enough, I'd been reading about ETFs over the weekend in the paper and online. I think initially I might take it carefully and either just go for units initially or else if after looking at them a bit more I want to check ETFs out more I might get a small amount and see how it goes.

Thanks for the website links, Cheerfulcat - I've used some before (though not as extensively as I will do) and there are a couple I've not visited before, so that's good.


One other idea that I've thought of is a way of spreading my investment over a longer period. At the moment I have a high income but that could easily drop to a much lower level where my contributions would be relatively small compared to what I'd put in initially.

In the first year I'd hope to put about 45k in, with a lump sum and monthly contributions. My initial plan was to use that to buy funds over a year. However, if my contributions had to drop off drastically after that then I'd have effectively put a huge amount in over just 1 year, which in the grand scheme of things isn't that long.

How's this for an idea - I put my initial 20k lump sum into something like gilts, bonds or even cash. Then I use my monthly contributions to buy the units. I could then gradually transfer the initial lump sum into funds over 3 to 4 years.

This has the disadvantage that the money will initially be earning very little compared to average stock market returns. But it has the advantage that I'll be ensuring that I don't put it all in the market in a short time. If business goes well then I'll still be buying funds with my monthly contributions, but if things go badly then I'll not also find that I've potentially put all my pension in the market just before it dropped.

Another benefit is that it'll ease me into investing in funds - if I start with small investments made from my monthly contributions then there's less risk if I get it wrong. 6 months into managing my pension I ought to have a far better idea of the markets and funds available and so ought to be able to make better decisions about where to invest.

Does that make sense? Or should I just think about the long term and invest over the next year and take any drops that might happen in the markets?

EdInvestor

I agrree asset allocation is the basic point you need to decide on.

I can;t see the point of unit trust proliferation of 15 or so.If you're going to do that you might as well cut out the middle man and buy a 15-share High Yield Portfolio of big blue chips and just reinvest the dividends long term for your equity component..

dunstonh

About Hybrid SIPPs having no charge on the wrapper - the HL SIPP says it's free to set up and deal in funds. Also there's no annual charge for holding cash or funds that pay them renewal commission. Are there other charges that HL charges that hybrid SIPPs wouldn't?

Switching charges between funds, commencement benfit charges, charges on death, statement provision, charges on contributions to name a few.

can;t see the point of unit trust proliferation of 15 or so.If you're going to do that you might as well cut out the middle man and buy a 15-share High Yield Portfolio of big blue chips and just reinvest the dividends long term for your equity component..

So instead of diversifying over 15 funds which would include hundreds of companies, you prefer to cut down to 15 individual shares?

It should be noted the Ed does buck the common held view on diversification. Not saying she is wrong as there is no real right or wrong with investing... as long as you know what you are doing and why. Personally, I think the way Ed suggests is highly risky. In 1984, the 3rd larged company on the FTSE100 (so a blue chip) was GEC, later collapsing as Marconi. You could also point fingers at Ferranti, British & Commonwealth, Polly Peck and Maxwell. You could also include Railtrack, British Energy, Eurotunnel, Coats Viyella, BTR, Dalgety, Trafalgar House and Sears which have all have various problems.

Spreading wide reduces the risk and effect of any one company going under having a significant impact on your portfolio.

EdInvestor

Personally, I think the way Ed suggests is highly risky

Actually it's not.There is a slight decrease in risk by increasing the number of shares to 20, but virtually no improvement after that.[Note that getting on for 70% of the money invested in UK trackers is in 20 shares only, and this is much more risky than an HYP because of the lack of sector diversification and the weighting by market cap.In 1999, how much of your tracker money was invested in VOD alone?].

The HYP is primarily a very long term no-tinker income strategy (like equity income funds) - though those wanting growth can reinvest the dividends.So if you have a 100k diversified 15-share portfolio of large UK blue chips with good yields, divi cover and low debt, paying an average yield of 5%, and one share fails,then you lose 6% of your 5,000 pound p.a income for that year.It is not a huge risk. Marconi would not have been a component of an HYP when it failed as it had turned into a speculative TMT stock anyway.

The idea that shares are always riskier than funds is nonsense.

Useful Times article on why dividend based strategies are less risky, more successful long term, and suitable for young people

cheerfulcat

dunstonh wrote:

Switching charges between funds, commencement benfit charges, charges on death, statement provision, charges on contributions to name a few.

There are no brokers/discount IFAs I can think of who charge for buying and selling funds within a SIPP wrapper. Very few charge for contributions. Not all charge on death.

cheerfulcat

Wibble wrote:

Another benefit is that it'll ease me into investing in funds - if I start with small investments made from my monthly contributions then there's less risk if I get it wrong. 6 months into managing my pension I ought to have a far better idea of the markets and funds available and so ought to be able to make better decisions about where to invest.

Does that make sense? Or should I just think about the long term and invest over the next year and take any drops that might happen in the markets?

Wibble, do what you're comfortable with. I am inclined to say that you can't time the market and that you might as well be invested from the beginning but if you would feel unhappy looking at, say, a 30% drop in your capital then phased investment is probably a better idea. Certainly it's a good idea to wait until you know what you're doing!

dunstonh

cheerfulcat wrote:

There are no brokers/discount IFAs I can think of who charge for buying and selling funds within a SIPP wrapper. Very few charge for contributions. Not all charge on death.

I was thinking specifically of SIPPdeal here (who get frequently mentioned).

1 - charge £20 per purchase of unit trusts (and subject to potential initial charge)
2 - charge at least £9.95 for purchase of shares.
3 - charge £15 on every "single" contribution. £15 to commence or alter a regular.

As for HL, I wasnt aware of their charging. However, I just looked at it and I cannot see what the big deal is about. They are keeping the trail commission for themselves and charging on external investments. That is no different to what other IFAs are doing on an advice product and with the hybrid SIPPs, will be able to do cheaper than HL, when funds only are used.

I was always under the impression that they gave back the bulk of the trail commission and it was that that allowed them to be cheaper.

david78

dunstonh wrote:

I was always under the impression that they gave back the bulk of the trail commission and it was that that allowed them to be cheaper.

They only rebate some of the commision on their PEP/ISA accounts (and possibly on their "unwrapped" fund a/c). For the SIPP they claim it is not allowed under current regulations, but what I think they mean is that they set up a separate deposit a/c to recieve the rebates and this is outside the wrapper -- so for a pension it would technically be a withdrawl of cash.