Planning for retirement in a volatile market can be daunting. Stocks are in a state of flux, bonds no longer exude safety after the market rout last year and the property market is squeezed between the cost-of-living crisis and rising interest rates. Self-invested personal pensions give investors the freedom to make their own choices, which should, in this environment, include safe-haven assets like gold, that go some way to protecting your retirement pot from the vagaries of economic turmoil.
For many years workplace pensions were the primary retirement savings schemes, provided by larger companies to attract and retain staff, although recent legislation requires that all companies enable employees to be enrolled in a pension scheme. Self-invested personal pensions were introduced in 1991 to allow investors more control over their pension, but the main change came in 2006 when the range of investment options for SIPPs was widened considerably and everyone was able to contribute to both a company pension plan and a SIPP.
A SIPP is a self-invested personal pension. You get to decide how much you put in and where it is invested. SIPPs have substantially opened up the pension market, and the breadth of investments that can be made into the SIPP should allow investors to choose a range of assets that suit their retirement requirements.
How much can I invest?
There is no limit to how much you can put into your pension annually, but there is a tax-free allowance of up to £40,000 and this can all be invested in a SIPP. The UK government provides 25% tax relief on pension contributions, so £32,000 would be from your income and the remaining £8,000 from tax relief. This rises to 45% for additional-rate income taxpayers.
What can I invest in?
Prior to 2006, the selection of investments allowed in a SIPP was limited to investments like shares, commercial property and bonds. Pension simplification came into effect on 6 April 2006 and enabled a much broader selection of investments in SIPPs including unquoted investments, loans, and even assets you own can be bought by the SIPP. You could buy agricultural land, a hotel, invest in a hedge fund or offshore funds, Real Estate Investment Trusts or gold bullion.
Shares, bonds and other financial instruments
Probably the most common SIPP investments are stocks. These can be chosen specifically and invested directly by buying the shares within the SIPP vehicle, or they can be part of a basket of shares like a unit trust. The level of autonomy that SIPPs afford is a key attraction for many investors, but it also does require a high level of knowledge and management. As you are in charge of the investment decisions, the mandate to buy and sell the shares comes directly from you, and if the shares perform badly then it will impact on the value of your pension pot.
It is prudent to spread the risk level and load across a selection of shares to avoid too much volatility, but this also requires knowledge of the markets and company performance. A unit trust or fund that consists of a selection of shares can smooth the risk for investors who want to surrender some autonomy of choice.
Physical Gold And Pensions
Discover the benefits of investing in physical gold through your SIPP with our handy guide.
There are commission charges for dealing shares which should be factored into your investment decisions. As with any investment, stocks can go down (the cost of living crisis and inflationary pressure has increased market volatility), or up (the recovery from the pandemic slide was relatively quick considering the steepness of the fall), and this may affect the value of your SIPP depending on how close you are to retirement.
SIPPs can also be invested in gilts and bonds, open-ended investment trusts, and exchange traded funds, all through a SIPP provider that allows these investments. Not all SIPP providers will offer the full gamut of investment options so it’s worth checking before signing up.
Property
You can invest in commercial property within a SIPP, owning a pub, shop, a care home or factory for example. The rent on the property can either be used to pay down any borrowing costs (you can borrow up to 50% of the net fund value of your SIPP) or to invest in other assets within the SIPP. Some people choose to buy their own commercial premises within their SIPP, securing the property and paying the rent to their SIPP.
It is legal to invest directly in residential property through a SIPP but there are punitive tax charges (55%) which make it financially inadvisable. Instead, you can invest in a residential property fund like a Real Estate Investment Trust (REIT).
Gold bullion
Gold is the only physical commodity that can form part of your SIPP portfolio and has been an investment option since 2014. Like most of the investments within a pension fund, gold appreciates free from capital gains tax. The requirements for including gold in a SIPP are that it must be in the form of a bar or wafer, its purity must be not less than 99.5% and it must be held (usually by a third party) in a secure environment like a vault.
The reasons to own gold in a pension fund are similar to investing in gold outside of a pension, but these reasons are amplified as you near retirement. Investing in gold is a way of diversifying your assets, ensuring that the volatility of the markets and other asset classes is balanced by a selection of different investments. Gold has long been seen as a safe-haven asset, rising over the long term, and maintaining its buying power through the centuries. It usually rises when other assets are in decline as investors flock to safe-haven gold in times of extreme volatility, and it is often used as a hedge against inflation because its value usually rises alongside the cost of other goods. The current inflationary environment has been a difficult one for investors. Market volatility when retirement is looming can significantly impact the value of your retirement fund, but bonds have also been less than stable and cash is being eroded by rampant inflation.
Safe-haven gold is especially useful in a SIPP when approaching retirement and there is less time for your portfolio to recover if the markets take a dive. Not all SIPP providers enable gold investment so it is important to check the parameters of your provider before choosing your SIPP.
Self-invested personal pensions have allowed confident investors to make their own decisions about where to invest their pension assets. The wide range of options makes diversification easy, and the safe-haven options like gold allow investors to balance their risk.
