I took a call from someone today who was looking for advice regarding SIPPs.
He was aware that they provided the opportunity to invest in more esoteric investments and he was particularly interested in carbon offsetting and biomass funds; he had heard they provided the potential for good returns.
Here is why I suggested he may prefer to steer clear of this type of investment:
· This type of investment is very high risk. It is a very niche area and is still underdeveloped. This means there is a high chance of losses and a lack of liquidity should he want to switch his holdings at any point.
· His pension funds had not been reviewed for a long time and he had stopped contributing a few years ago after becoming self employed. As a result they were worth a “pitiful” (his words) £60,000. Exposing your pension fund to a high risk investment is a high stakes gamble with your retirement. Yes, it could increase significantly in value but it could equally become worthless which would have a serious impact on his retirement lifestyle.
· Esoteric investments like these should at best represent a small percentage of a pension fund where the balance in invested in more mainstream assets.
· The minimum investment was £15,000 and so would represent at least 25% of his portfolio; a significant holding for any single investment.
· The charges were extremely high; approximately 12% per annum for a £15,000 investment. This would mean he would need a return of 12% each year just to cover costs.
· It would be more appropriate to invest in the major asset classes within a balanced portfolio. While the returns are not predictable they are likely to provide a less volatile annual return and he will be able to switch his funds around without risk of losing access.
· His pension funds were not necessarily unsuitable but perhaps were simply inappropriately invested.
· If he wants to build up a pension fund to provide sufficient income in retirement he should consider making more contributions rather than relying on investment growth alone.