Good afternoon. Welcome to Good Money Guide TV. Today, we’re here with Rebecca O’Keeffe from Interactive Investor. We’re going to discuss SIPPs, the pros and cons of having a SIPP, what you can invest in them, and also, we’re going to touch briefly on how Interactive Investor addresses that market and the products they offer around SIPPs. So Rebecca, thank you very much for joining us. It’s nice to see you.
Do you just want to quickly explain to us and our viewers what a SIPP is?
So a SIPP stands for self-invested personal pension, which as the name suggests is basically a DIY pension. So it’s a do-it-yourself pension for those people who are confident enough to want to make their own investment decisions. You are the one that gets to choose very much what you put inside your SIPP and the value of your pension pot at the end of your working life and how much you’ve contributed and how well your investments have done determine how good or bad a retirement you’re actually going to have.
So would you say it’s a product for confident investors or should everybody be managing their own SIPP, do you think?
I think there is an element of me that says people need to be more engaged with their pensions. It’s quite easy to have a sort of hour-long conversation with an IFA way back when and get yourself stuck in the default pension fund, and all of a sudden, you have no idea what you’re invested in, what it’s worth, and 20 years down the line, it can be difficult to unravel the number of pensions that you have from your previous potential employers. So from that point of view, absolutely. I think basically, investors need to sort of wake up and potentially take more responsibility for their own retirement, and a SIPP is a really great place to start.
And in terms of what you can put in a SIPP, is it limited or are there a broad range of investments that you can put in them?
Well there are two types of SIPPs. So one is the low-cost option, and that basically allowed you to invest across the market. So anything that’s tradable. So what we’re talking about here is stocks, both UK and international, bonds, funds, investment trusts, exchange traded funds. So anything that you might want to potentially invest in can go in a low-cost SIP.
The alternative is a full SIPP and included in that, on top of all of the other investments, you can actually hold direct commercial property. So for the vast majority of people, they’re not likely to want to hold directly held commercial property in their SIPP, so a low-cost SIPP is probably your best option. For some who may have a commercial property associated with their business, a full-blown SIPP with probably higher charges may be the way to go. But for the majority of people, we are likely to find that a low-cost SIPP that you can get at most brokers like Interactive Investor and others is a reasonable starting point.
And let’s just quickly talk about the pros and of having a SIP. We have to look at these products in a balanced way. So do you just want to talk us through the major benefits of having a SIP?
Well I think before you even start looking at the SIPP benefits themselves, the benefits of pensions overall are where to begin the story, and the biggest benefit of all with a pension is the tax relief that you get. So if you’re a basic rate taxpayer, you are able to claim 20% tax relief. If you are a 40% taxpayer or a higher rate taxpayer, you are able to claim 40%. And an additional rate taxpayer gets to claim 45%, though there is a caveat with additional rate taxpayers in that the amount of tax relief they can claim reduces the more they earn. So that is a really good starting point. And let’s put it this way. So in order for you to end up with £100 in your pension point, you only actually need to contribute £60 from your take home pay as a higher rate taxpayer. But if you look at it on the other way and you said to yourself what sort of return would I need to achieve in order to turn £60 into £100, that’s actually a return of over 66%, which is just enormous. So that gives you an indication of how valuable tax relief on pensions really is. And that is far and away the most effective sort of benefit of any pension scheme.
Another benefit to look at is that pensions actually change your adjustable net earnings. So it’s a bit of a tax jargon speak but if you are on the cusp of say losing child benefit allowance because you’re a high earner, or even potentially if you’re earning over £100,000 losing your personal allowance, investing into a pension reduces your net earnings or your adjustable net earnings, so it could be a highly, highly effective tax strategy in order to invest in a pension at all.
And finally, I guess it used to be the case that when you were forced to buy an annuity, pensions were sort of deemed to be really unattractive, but the new pensions freedoms allow you to manage your pension how you’d like, all the way through your retirement. That has opened up people’s eyes to the benefits of pension investing. So that’s certainly a reasonable sort of pro or benefit from investing in a pension at all.
So in terms of SIPPs and the benefits of a SIPP, the sheer vast array of investments that you can choose is obviously the biggest single benefit. A lot of our customers, for example, want to invest in directly held shares, or they might prefer investment trusts to funds. Bear in mind that if you are investing in a pension, you tend to be restricted to a choice of about 100 investment funds, whereas actually, you may want to choose to invest in a very different way in your SIP. So having the luxury of being able to choose how and when you invest is always a good thing. Having more control, knowing what you’re invested in, knowing what your targets and benchmarks are – that’s where a SIPP stands out.
And of course, it’s enjoyable. Everybody wants to beat the market. I mean the market and investing and taking a global macro view on the investment landscape is, for many people, an enjoyable thing. So having that connection.
It is, absolutely. And I think that is part of it. I think previously, when your pension was sort of one or two steps removed, you didn’t actually associate it being your money and what impact it was going to have on your retirement, whereas a SIPP does definitely focus the mind in a lot of ways in terms of how and where you want to invest.
The flipside to that is of course that it is quite scary, and for some people, the idea of managing what would hopefully anyway become a reasonably large amount of money by the time you actually get to retire could be quite intimidating. So definitely, if it’s going to give you sleepless nights, you might want to think about it again.
It’s not for everyone, yeah.
In some ways, sort of, you can almost take too little risk rather than too much risk when it comes to investing. Certainly sitting in cash for the moment is not an attractive option in real terms with inflation. It’s outstripping the value that you’re getting on any cash return. You’re actually losing money in real terms.
Well you’re losing money on the basis that interest rates are lower than inflation, but you don’t have the investment risk. I mean we all know that investing is incredibly boring and if you just leave your money for 20 years, it’s going to grow. But in the short term, you do run a bit of investment risk as well.
Of course. And you can’t get away from that fact. The simple fact of the matter is that you have to take risk when you invest. And leaving it in cash is not a good long-term option. The latest Barclays Equity Gilt Study suggested that… so they’ve looked at the markets for over 100 years, and basically, on any timeframe, any five-year timeframe, stocks beat cash 76% of the time, and if you extended that investment horizon out to ten years, equity, stocks, shares beat cash 91% of the time. So the longer your time horizon, the better it is for you and the more likely you are to actually be able to beat an equivalent cash return, and hopefully, the better your retirement might be.
So let’s talk about the risks as well. You know, we touched briefly on the fact that it’s not for everybody and with all investing, there is risk. So what would you say the major downsides of managing a SIPP is?
The absolute downside with any investment strategy is the idea that you might not get back as much as you put in. They’re the standard risk warnings that you see and they’re there for a reason because it is important to note that it might not go the way you want. Fundamentally, you can help yourself out in a number of ways. So if you diversify your holdings, and again, probably a too often used word, but being invested in a single stock or a single fund or a single sector, or even a single geographic area isn’t necessarily going to deliver great returns.
Diversification is the most important thing.
Particularly with a long-term investment product; you should be split between bonds, equities, funds, everything, shouldn’t we?
Yeah, absolutely. There is no doubt that spreading your assets and being diversified is an important point, and that also potentially extends to geographic area as well. A lot of UK investors can have what’s known as a home bias. So you have a tendency to be invested more in the UK than you might otherwise want to be, and obviously, the best-performing market over the last sort of number of decades has been the US market.
Of course, yeah. You look at all the global funds; they’ve done incredibly well, haven’t they?
Absolutely. So from that point of view, choosing where you want to invest and making sure that you have exposure to a variety of different asset classes is a really good starting point. So that is your biggest risk.
I mean as I say, the second risk is that you simply either aren’t comfortable at the start or you become increasingly uncomfortable as your assets grow with managing your money yourself. And when you’re talking about potentially hundreds of thousands of pounds, which is what your pension could grow to, would hopefully grow to, then it’s more difficult. You know, if you start with £5,000, then it doesn’t seem like a huge deal. It obviously is a large amount of money to a lot of people, but you can manage that. But if you’re talking about investing a pension pot of 500,000, all of a sudden, the risks are so much higher. The stakes sort of really make it much more difficult. And even though you’ve got exactly the same ideas about what you want to do and the targets you’ve got, it is inherently more difficult when you’ve got a larger amount of money.
But then you don’t have to manage it forever, do you? I mean you can at some point move your SIPP into your wealth manager or your IFA, can’t you?
Yes. And I think that’s it. I think the biggest single thing is to start as early as you can, because the low lovely compound interest makes it essential to actually get going as soon as you can.
So the second thing is that SIPPs are also available as potential workplace pensions as well. It used to be that SIPPs were very much the preserve of the wealthy or sort of people who were much more sophisticated investors. That’s absolutely not the case anymore. SIPPs are simply a pension wrapper. You can decide what you want to put in it. So you have the option to talk to your employer about investing in a SIPP instead of maybe the workplace pension. But that is not in lieu of the workplace pension because obviously, the huge benefit that you get from being an employee is that your employer will make pension contributions as well. So don’t give up that.
And the important thing as well is if you’re making extra contributions into a SIPP, it’s not like an ISA, you can’t get the money back, can you, until you retire?
No. So another important point to note is the accessibility issue when it comes to pensions. It can actually give you enforced discipline because you know you can’t access your money, but at this current time, you can’t access your money until you’re 55. Those age limits are changing, so it changes to 57 by 2028 and it will then become ten years below state retirement age. So yes, it’s a long way away potentially, but it does mean that your money has a lot of time to work, hopefully, and as I say, the tax benefits tend to be a really good… it gives you a great starting point when you’re investing in a SIP.
One final point before we move on to Interactive Investors SIPP products, we had a reader ask a question the other day about exit fees. He had 800,000 in his SIPP and one of the things he was concerned about were exit fees from his provider. And he obviously wanted to move to a different one. Does Interactive Investor help out with exit fees and incentives for people who want to…?
We don’t charge exit fees, so as far as we’re concerned, you should be able to sort of like our product or go. That is effectively… you know, we don’t charge exit fees. And the industry is moving in that direction, slightly slower than we might like, but the good thing is that most people are coming round to the idea that you can’t create hostages for your own customers. You have to actually offer them the ability to leave if they want to leave.
And what about incentives for people who do have large exit fees to cover? Do you cover any of those on the way in if someone came to you and said look, I’ve got a million in my SIP; these guys are holding me to ransom for £200 per stock.
We tend not to cover exit fees per se but we do have SIPP transfer offers at times and we do have one running at the moment. So certainly, you know, in the first instance, if I was in that situation, I would ask my current broker what they were playing at, and whether they were aware of recent FCA rules and how this was going to be perceived. And then, if that didn’t work, I would certainly contact any new broker that you were hoping to move to and see if they could help out.
Excellent. Very helpful. So let’s move on to the Interactive Investor SIP. Let’s just quickly go through the main advantages of having a SIPP with Interactive Investor, and also, your Interactive Investor Super 60 offering as well.
So the II SIPP is a low-cost SIP. We don’t offer the option to hold directly held commercial property. So we offer the entire marketplace, so that is any UK or international stock you can think of, investment trust, funds, exchange traded funds, bonds. So basically, we are a whole market provider and our guys can invest as they like. When you become a customer of Interactive Investor, you choose from one of three trading plans, depending on what sort of customer you are; whether you’re a frequent trader or you prefer to trade funds, or you actively want to invest in shares. And on top of that, we then have a £10 per month SIPP administration fee. So Interactive Investor are a flat fee provider. Fundamentally, there are two types of provider in the marketplaces. One is flat fees and one is a percentage-based provider. So a flat fee provider, you know exactly what you’re going to pay, and it can be very good news if you actually have assets, because obviously, you are not sort of having to pay more the more that’s in your account.
The more money you have, the more it costs.
Exactly. Fundamentally, we believe that sort of profits that you make are profits that you should keep rather than us try and eat into any sort of profits.
What about advice? Does Interactive Investor offer advice?
No. We are an execution only customer service, so that means our customers choose how they want to invest and what they want to invest in. That’s not to say that we don’t provide a whole load of tools and content and resources and filters and rated lists and other information to help you make decisions, but fundamentally, the decision is absolutely the customer’s to make, because you’re the one that actually has to live with the investment choices.
And let’s talk about the II Super 60. Best buy lists have, for obvious reasons in recent times, got a bit of a bad rap with providers pushing customers towards preferred funds. So how does the Interactive Investor Super 60 differ from other best buy lists out there?
So we differ in two fundamental ways. We have the same sort of panel of experts who are looking at it. They’re independent; they actually choose to look at the whole of market and decide what is a good option for investors. So that means we effectively have done a lot of the heavy lifting for investors. But the two ways in which we differ are number one, there are no commercial biases or incentives. We are agnostic on price. That’s probably a bit jargony, but basically, it doesn’t matter to us whether you want to purchase funds or investment trusts or ETFs or shares, it costs exactly the same. So we are not pushing people towards one particular product or another. So our list actually contains investment trusts, it contains funds, and it contains ETFs, which makes us actually I think unique in the UK that we have all options, including passive options, on our rated list.
And the second way in which we are sort of different from other providers is that we absolutely guarantee that there are no commercial incentives or other sort of ways in which a customer might perceive that there are conflicts of interest, because that’s the big thing. You want to be sure when you’re buying something off a rated list that you are trusting the process, that you are trusting how people have selected the list, and that you are not being pushed into a particular product for a particular reason.
Exactly. If one fund’s paying you a 4% commission and one fund, it’s obvious which one you’re going to recommend.
Exactly. And it simply does not make sense. So yes, funds, sort of rated lists have got a very bad rap, to use your words, this year, but that is not to say that they aren’t necessarily a good possible starting point for investors.
No, I think it’s very important. And some investors don’t know where to start. And I think with all investing, all you can do is put ideas in front of people and they will either agree with them or disagree with them, and it’s their choice to go on to invest one way or another.
Absolutely. I mean when you look at the number, the sheer number of potential investment options there are, it makes huge sense to try and actually cut down the work that you have to do in order to try and get to a reasonable starting point. We are not sort of suggesting that there is only one fund that you can buy in the UK equity income sector. But there are probably a lot of funds that you don’t actually need to look at because they don’t or they haven’t performed over the long term, and they don’t have enough going for them to make them a good option or an attractive option.
And actually, all you need to do is look on Trustnet or Morning Star and you can filter these funds into the ones that have consistently performed and the ones that haven’t.
And that is exactly what investors should do. So what you’re trying to do is you’re trying to actually come up with your own personal investment objectives, where you want to invest, how you want to invest, and then once you’ve actually got that far, you should start looking at all the filters and the information that’s available. We are pretty transparent as an industry. That sounds very strange, I know, but there is an awful lot of information out there. Fact sheets that will give you everything that you need to know. The ability to compare different funds or trusts or ETFs or any investment that you might want to invest in. So if you have the wherewithal to do it then it’s a really good idea to look at the information that’s out there.
And if you’re an existing investor, it’s also a good idea to potentially traffic light your investments. You know, you should be paying attention to them, in an ideal world, at least once a quarter, but even if it’s your New Year’s resolution to do it, take a look at what you hold, look at how it’s performed over time. Is it one that you’re happy with, that you want to continue owning, in which case, it’s green, that’s great. Is it starting to look like the performance wasn’t as good as other options? Or is it some where the fund manager might’ve changed or there’s a different emphasis on the fund? That might be an amber light. And if you’ve given the fund or trust manager the benefit of the doubt and they haven’t actually sort of pulled their socks up, then that might be one to consider changing.
And of course, you have to look at the global macro situation as well. If a fund is geared towards investing in emerging markets and emerging markets haven’t had a particularly good year, then you have to also look at whether or not a particular section…
Absolutely. So in principle, you’re not necessarily going not be comparing an emerging market fund with the US ones, because that would not give you a fair comparison. But within the sectors that you own or if you want to own a particular European-style stock or fund, then that’s the comparison that you should be making.
Excellent. So final question on the SIPP market. Can you just talk about fees? What should people be mindful of when looking at the fees they’re going to be charged for having a SIPP account?
That’s a great question. So the first thing is, when you look at fees between different investment types, for example, do you want to own a passive fund or an active fund that’s really important because the impact of fees can’t be understated. The huge impact that a 1% fee has over the lifetime of 40 or 50 years of investment could make the different between cruises and caravans. But the other thing to note is that fees aren’t necessarily just about how much you’re paying for your underlying investment. They are of course relevant to your choice of provider as well. So again, you need to ask yourself the question whether your assets are sufficiently large for you to consider a flat fee provider or whether you are not happy enough paying the percentage fee. So that is again something that you need to be very mindful of because it’s really important to stress how vital fees are over the long term.
Okay, excellent. Rebecca, thank you very much. Thank you very much for watching this episode of Good Money Guide TV. We’ll be back with another asset class shortly. Thank you.
Richard founded the Good Money Guide (previously Good Broker Guide) in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.