Ok, so you have set up your SIPP, now what are you going to do with it? After all, a SIPP is simply a framework within which you can manage your own pension investments in a tax efficient manner. What you get out of it at retirement depends on what you put into it during the preceding years.

The Share Centre’s Sheridan Admans points out that ‘One of the keys to SIPPs is to remember that when it comes to investing, your time horizon is very important. SIPP investors are generally going to have a preferred retirement date. Your investment strategy will also be influenced by your attitude to risk, but I would argue that the most important element when it comes to devising a strategy for a SIPP is the level of experience of the individual investor.’

Seek advice on how to run your SIPP portfolio

He adds ‘There are a lot of SIPPs out there which are basically fund purchase arrangements. Remember that SIPPs are a DIY option. You have to make the decisions yourself, although many SIPP investors will use an adviser to help them.’

Admans continues ‘You should also ask to what degree you are going to use your adviser. Bear in mind that while some advisers will provide advice on shares and funds, others will cover funds only. A key element is the amount of time that you, as an individual investor, can devote to the business of running your own pension fund. If you haven’t got much time to devote to your portfolio, you are probably better off going down the fund route.’

It may seem like stating the obvious, but there is little point in taking out a SIPP unless you are going to use it. Christine Howlett, of SIPP provider Pointon York, says that ‘Too many people think that they will just set up a SIPP and put money into it, but then don’t have any kind of strategy for what they are going to do with it. If investors are going to do it on an individual basis, i.e. without using an adviser, then they need to sit down and work out what they want to achieve, in terms of their final goals for retirement.’

She adds ‘They will then see how much they have to put in as a lump sum, or invest on a regular basis to match their goals at retirement, allowing for average growth. This, in turn, will determine the amount of risk they are going to have to take and how short of their target they are going to be. You have to be realistic about your investment goals.’

Use your SIPP

Tom McPhail, head of pensions at Hargreaves Lansdown, suggests that ‘the starting point is to know what kind of an investor you are. If you just want to choose a managed fund and then come back in 30 years to see whether you can afford to retire, then, actually, you should go and buy a stakeholder plan instead.’

Christine Howlett agrees. ‘If you are not going to be proactive, either on your own or with an adviser, in managing your retirement fund, then you have to ask why you would bother with a SIPP. You would probably be better off with a traditional insurance company pension.’

She points out that ‘As providers of an open architecture SIPP mechanism it is our role to point out to people what they can, and cannot, put into a SIPP and also the risks involved in investments such as unquoted shares. It is a very powerful framework if it is used properly. But, at the end of the day, it must be “fit for purpose” and the primary objective should be to make sure that the SIPP investor gets the best possible return at retirement.’

A SIPP is your flexible friend

Part of the challenge is that, with a SIPP, you really are in control, with a wide range of investments to choose from. So making the right choice is extremely important, both in terms of specific investments and overall asset allocation.

Chris Smeaton, propositions & e-commerce manager at SIPP provider James Hay, points out that ‘One of the great attractions of SIPPs is their flexibility to allocate across a wide range of investment strategies. The advantage of this becomes particularly apparent during times of market volatility, where asset allocation decisions are paramount to investment returns.’

He adds ‘This advantage is reflected in the high proportion of cash we are now seeing in SIPP portfolios. Our research shows up to 35 per cent of some SIPP portfolios are held in cash currently, and investors need to consider cash rates when they chose a SIPP. However, SIPP investors may not be fully capitalising on this clear benefit due to the low cash rates offered by some SIPP providers. In a lower return environment, these differences in cash rates are quite substantial.’

Pointon York’s Christine Howlett observes that ‘The thing about an open plan SIPP like ours, where we are just providing the administrative framework, is that the investor can choose best of breed investment managers for each particular area. So you can use whichever manager is best for each particular asset class. For example, cash is a very important element at the moment and a lot of high interest accounts are taking SIPP money.’

She points out that  ‘It is a case of being sensible. Often people invest emotionally, rather than logically. They invest in something because it is exciting, rather than because it will give them a long-term return. It all has to be done in the context of who you are, how old you are and how long you are going to be investing before retirement.’

Regular monitoring

Then there is the question of how often to review your SIPP investments. A recent research report published by Barings Asset Management suggested that only 22 per cent of people with some form of pension plan had reviewed it within the previous 12 months, and that 54 per cent never reviewed their pension at all.

Barings’ chief investment officer, Marino Valensise, observed that ‘These statistics are very worrying. It is surprising to see that so many people still have no idea where their money is being invested or, indeed, whether their pension is producing the returns necessary to support them in retirement. People should review their pension schemes on an annual basis and I would urge them to take independent financial advice. Circumstances change and individuals need to amend their pension portfolio in line with these changes.’

Of course, it is far more likely that an investor with a SIPP is going to take a more active approach to reviewing their investments than those with a more traditional insurance company product, but the question of how frequently to do so will depend largely on the individual investor’s goals and strategy. Tom McPhail feels that ‘if you are making frequent purchases of individual equities, perhaps shorting them as well in the hope of hedging your position, then you should be reviewing  your SIPP fund possibly daily, or even more frequently. At the other end of the spectrum, if you have invested in a commercial property then you may not need to review it for five years.’

He adds ‘If you are holding a portfolio of managed funds, then you might only look to review them every six to twelve months, as you are effectively delegating asset allocation decisions to the manager, so your primary concern is simply to monitor whether he is performing well relative to his peers.’

Be prepared to adapt

Tom McPhail suggests that ‘As you start to make sector decisions with your funds, the need to review them more frequently emerges, perhaps every couple of months. Deliberate decisions to go overweight in Japan or corporate bonds today, for example, might require a review in not more than a month or two. If you are taking specific bets on individual stocks, particularly the smaller cap more volatile ones, then you are into weekly or daily reviews and of course if you start going down the CFD road then possibly hourly!’

Sheridan Admans feels that in terms of overall strategy, diversification is an important element. ‘It is a good idea with any investment to be as diversified as possible and SIPPs are no exception. You should build a diversified base in collective funds. This will probably mean unit trusts and OEICs for the novice investor and perhaps investment trusts for those with a bit more experience.’

He adds ‘If you are looking for a lower risk portfolio, you might opt for a broad base in UK orientated investment funds with some FTSE 100 stocks on top. If you are more adventurous, you might look to overseas-invested funds with possibly some mid caps for extra growth.

‘This approach will probably be more suitable for younger investors, while older investors will be more concerned with protecting capital in order to generate the most income when they retire.’