Pension investing: Short or long-term approach?

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Sipps - June 2014

But in light of the government’s recent overhaul of the pensions industry which means individuals will no longer have to purchase an annuity at retirement, are investors taking a different approach to investing in Sipps?

Andy Tuck, director of Walker Crips Investment Management, points out that prior to the new legislation, Sipps did allow flexible drawdown so an investor could keep a lump sum in an invested environment. He suggests a couple of investment themes which could play out under the new rules though.

“One thing that strikes me is that perhaps people are going to want larger sums of readily available cash in future, so they may want to invest a bit more conservatively the closer they get to retirement,” he notes.

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“It still holds true that a lot of younger people will need that longer term high level of exposure to global stock markets either through managed funds or through direct equities to gain the full benefit of long term capital growth within their pension scheme.”

More generally the pensions industry shake-up seems to have opened up the investment opportunities for individuals.

Ian Price, divisional director of pensions at St James’s Place, agrees there is now more choice when it comes to how to invest in and draw from a pension pot.

“The key thing this has driven is it’s created this environment where people appear to have far more choice, therefore I think they will look more closely at the options that are available and plan how they are likely to take their money out over a period of time,” he says.

He is hopeful that the changes have “re-energised” people to plan for retirement, with investors now more aware of other trends, such as increased life expectancy.

One theme that Jeff Steedman, Xafinity’s head of Sipp and Ssas business development, is seeing play out among business owners is the purchase of the premises they trade from in a bid to retain some control.

He remarks: “I often find there are two different types of client out there; there are some people who like the stock market and are quite happy to let their financial adviser give them advice and put it into funds and shares, but some small business people simply don’t like the stock market because they don’t feel they have any control over that.”

Mr Steedman explains how it works: “If your business currently owns the property you might owe the bank some of that in the form of a mortgage. But if you and your business partner, or whoever you’re in business with, have existing pension money that you’ve saved up over the years you can put that in a Sipp and use the cash to buy the business.

“The business has the money and pays off the mortgage and can reinvest it and grow the business. On the pension side, the pension scheme leases the property out to the company and gets its growth in rent, at roughly 7.5-10 per cent a year in terms of overall value, so your pension fund is getting pretty decent annual growth.”