Fiona Murphy asks what trends advisers and providers are seeing in SIPP investments
The beauty of the SIPP has always been the flexibility and choice it offers. But despite having the pick of a wide investment menu, SIPP investors are not immune to sustained turmoil in equity markets.
Alongside that, those with bespoke SIPPs will have either seen, or been personally affected by, recent headlines where some of the more esoteric investments have gone terribly wrong. So what investment trends are providers and IFAs seeing among their clients as a result of these concerns?
Commercial property has always been big business in the SIPP market. In a straw poll at the last Association of Member Directed Pension Schemes (AMPS) conference, 62% of SIPP providers in the room revealed they have over 100 properties in SIPPs under their control.
But as Julia Bassett, chief executive at Barnett Waddingham, says: "Commercial property has hit a bit of a dip. Our client base typically, historically would have been people who would invest in commercial property."
Commercial property has always been a popular choice for sophisticated investors, so why has there been a fall in property purchase through SIPPS?
Karl Hartey, managing director of Applewood Wealth Management, explains some of the issues hitting this market.
He says: "[On] the retail side there is an awful lot of shops on the high street currently empty, so there is a great buying opportunity, but people may be a bit reluctant because they may feel the market may still have a way to drop. [And] on the office side of things, rents have softened an awful lot.
"I think it is scaring purchasers off because they are not getting the yield or the return of what they were getting. Although there are lots of properties out there, there is a lack of buyers."
Reluctance and reassurance
Hartey adds: "SIPPs are a good area. How do you buy a commercial property? You either put the cash in yourself, not many people are doing that. Or if you go to the [bank for a loan], it is hard to get money from the bank.
"Your pension fund is a wonderful place to use it, because it is sort of not your money in a round-about way. It is money for the future. [But] there still seems to be a bit of reluctance."
But despite the shaky market, it is not all bad news for property investment.
Bassett says: "It has been quiet with the recession but we're seeing a few new property purchases a month happening at the moment. So we might be in a double-dip recession but someone has got some reassurance that the property market is working. Or maybe some of them are buying them for their own businesses which they can lease back."
Some IFAs are seeing an increase in enquiries coming in on how to invest in property via a pension. Nick Earl, IFA at Wardour Partners LLP, says: "We are looking at commercial property more. We had some inquiries from accountants to ourselves, for their clients looking at maybe using pension planning to buy their own offices.
"We have had more of that due to the restrictions on buy-to-lets becoming a bit more stringent in their requirements. And so, they are looking inward now and seeing how they can fund their purchase. But not all clients fit that - it tends to be [smaller] owner-occupied businesses."
And there have been changing trends in how SIPP clients invest in property.
Martin Tilley, director of technical service at Dentons Pension Management, reveals: "Both people I have seen this morning are looking at joint rather than outright ownership because the SIPP or SSAS is not large enough to acquire the whole thing at the outset. There is a fair bit of that going on."
But how does this work?
Tilley explains: "Let's say a business wants to buy a commercial property and can't afford to do it, itself, but the pension scheme has got £200,000 in it. So the pension scheme chips in £200,000 and buys half. The company buys the other half."
"And then over the course of the next few years, what the company can do, is make a contribution in specie of a proportion of the property to the pension scheme. So, instead of paying £50,000 in for each member as a pension contribution, they can say we will just put another proportion of the property into the pension scheme, allocate that to each member, and the way it's done is by using a side trust."
Commercial property represents the bespoke end of the scale. Meanwhile, many SIPP clients will be watching investment markets nervously, wondering how to avoid heavy losses.
Earl says: "Quite a lot [of clients] are holding money in their SIPP cash accounts with a view to how the eurozone crisis pans out."
Tony Hales, managing director of Stadia Trustees, agrees: "In March and April we've seen a significant increase in cash. If we look at January and February, we saw an average of 12% going into cash, and in March and April around 33%."
Cash is still proving to be a safe haven in periods of economic uncertainty, but it is not without its problems.
Bassett warns: "Cash should not be something [people] should hold for the long term. [But] I think people like the security of it; they like to see what they have got in pound notes."
While this is a low-risk strategy, investors will not get the kind of returns they seek long term in cash.
But a one-size approach to investment doesn't fit all.
As Jason Wittcombe, chartered financial planner at Evolve Financial Planning, says: "If you have got someone who has got two years left to retirement and they are going to buy an annuity, they should probably be 100% in cash. If you have got someone who is 25, saving on a regular basis for their pension and willing to take risk, it should probably all be in equities."
Esoteric and unregulated
With equity markets buckling, it takes no great leap of the imagination to think that people may turn to esoteric investments. But they are as not as prominent as you may think.
Bassett says: "We have a small percentage of people who invest in UCIS investments but there is a lot of controversy in the press and a lot of reports from the FSA on various scams."
"They are supposed to be marketed to sophisticated investors, they are not meant to be marketed to retail clients, although some IFAs are allowed to market them to their clients. [But] there has not been a big change in that. It is just a small investment class that is ticking along."
Meanwhile, Hales says oil and wheat have been top performers because, after all, they are essential resources.
"Over the past three-to-four years, [we think] oil is the best performer people have through the SIPPs that we administer," he says.
"But the oil price is very high now. Just over a year ago, it was down to $80 a barrel, but it is now $110 or $120 a barrel. [But] oil can be very volatile, [and] wherever it is in the world, it is denominated in US dollars [which leads to exchange rate issues]."
But many IFAs continue to steer clear of these ventures. They do so in a bid to keep client's investments as smooth as possible, which is particularly important when trying to build retirement funds.
Gold also elicits strong aversion from many IFAs.
Dennis Hall, managing director of Yellowtail Financial Planning, says: "We don't understand where the value is in gold. It is speculative, it doesn't generate an income. People buy it through fear rather than an Aurelian investment story, so we don't use it. It is quite volatile and we don't understand why it is the price it is. You want to invest because it is going to earn you some money somehow."
But aside from volatility, returns and uncertainty, there may be other reasons advisers are unwilling to coax clients away from mainstream investments.
Wittcombe says: "On the equities side, we use tracker funds to really keep the costs to a minimum. If you are investing in commercial property, hedge funds or private equity, you are usually paying a lot more in fund management costs.
"By using tracker funds, you can keep the costs extremely low. Over one year [this] probably doesn't make an enormous amount of difference, but over a number of decades, this makes a huge difference to the amount of money you have left in your pension pot at retirement."
Whatever IFAs help their clients invest in and despite trends providers are seeing, one concern dominates business.
As Wittcombe says when asked about investment trends: "Whether it is in a SIPP or other pension, we need to help clients take the right level of risk. We must bear in mind how much risk they want to take and how much risk they need to take - which are often two different things - and what their timescale of investment is.
"This will always be the crucial underpin for any client investing through a SIPP."
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