Friday marks the end of pension awareness week. Since automatic enrolment become a legal requirement in 2017, millions of workers have joined pension schemes. But what else can they do to prepare for retirement?
There is a host of information available to make people aware of benefits of pension schemes and while tools like the pensions dashboard are still in the making there are options to explore, such as a self-invested personal pension (SIPP).
A SIPP, as the name suggests, is something you can do yourself provided you have the required expertise and knowledge of investing in stock markets. However, it is recommended that you use a regulated financial adviser to help choose and manage SIPP investments if not.
Helen Morrissey, Yahoo Finance UK's pensions columnist and head of retirement analysis at Hargreaves Lansdown, says the flexibility to manage your investments was a "huge benefit" of SIPPs.
"You will have access to a wider range of investments than with a standard pension provider," she adds. That includes shares, funds, investment trusts and even property.
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"This range of choice gives you the opportunity to invest in line with your values while building your financial resilience in retirement,” Morrissey says.
Anyone under the age of 75 in the UK can open a SIPP and you can also hold one in addition to a workplace pension. In fact, you can ask an employer if they would contribute to SIPP instead of a workplace pension.
As with other types of pension, SIPP investments can grow free from income and capital gains taxes. In addition, contributions are also eligible for tax relief, meaning the government effectively tops up money you pay into a SIPP or other pensions, by 20%.
Higher-rate tax payers can also claim back an additional 20% through a self-assessment tax return, going up to 25% for additional-rate taxpayers.
The maximum most people can contribute tax-free to their SIPP a year is £60,000.
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Emma Wall, head of investment analysis and research at Hargreaves Lansdown, says that both workplace pensions and SIPPs can be set to a "default option", where investments are based around a set level of risk depending on life stage.
For those still working and far away from retirement, also known as the "accumulation phase", she explains that the pension pot is typically invested more in "growth assets" like stocks. Meanwhile, the importance of capital preservation for those approaching retirement age means their pot tends to be invested in lower-risk assets, such as bonds.
"For most people, this default will be ideal to take care of your retirement savings," Wall says. "But for some, this may be an opportunity to express values, avoid certain sectors or supplement other investments."
If that is the case, here are some funds which experts say are worth considering to include among your SIPP investments.
Fund picks for SIPPs
The first Wall suggests taking a look at is the Legal & General Future World ESG Developed Index (0P0001F4XX.L), which is a passive fund invested in about 1,400 global companies that are listed in developed markets – predominantly the US, UK and Europe.
The fund is focused toward sectors such as technology, pharmaceuticals and financials and weights more money in companies that score well on different environmental, social and governance factors.
"Global equity funds provide a good foundation to an investment portfolio focused on long-term growth," says Wall. "Investing in companies across the globe provides a good level of diversification in a single fund."
Top holdings in the fund, as of June, included tech giants Microsoft (MSFT) and Nvidia (NVDA).
The fund has generated a return of 20% on a one-year basis and 73% over five years, according to data provided by Hargreaves Lansdown. That is only slightly behind the performance of its benchmark, the Solactive L&G Enhanced ESG Developed Index, which is up nearly 22% over one-year and 77% over five-years.
Next up is the Schroder Asian Alpha Plus (0P0000T360.L) fund, which is an active fund that invests in larger companies in the likes of Hong Kong, India and Taiwan. Samsung (005930.KS), Tencent (0700.HK) and Infosys (INFY) are technology stocks included in the fund's top 10 holdings.
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Richard Sennitt, who has been at Schroders since 1993, is the lead manager on the fund, which is up 10% over the last year, versus a 12% rise in the benchmark MSCI AC Asia ex Japan index. Over five years, the fund has comfortably beaten the 21% return generated by the benchmark, up 31%.
"Asian funds are a great way to add diversification to a portfolio that is focused on long-term investing, which makes them ideal for a SIPP," says Wall.
Jonathan Moyes, head of investment research at the Wealth Club, says that another portfolio diversifier could be the HgCapital Trust (HGT.L), as it provides investors access to the private equity firm's funds through a single listed investment.
"Individual investors tend to have limited access to leading private equity firms, and so the likes of the HgCapital Trust enable investors to gain exposure to one of the world’s best performing private equity managers," Moyes explains.
The Hg private equity firm specialises in investments in European and North American B2B software and service businesses and has more than $70bn under management. That makes it one of the largest private software investors in the world.
Moyes also points out that it has posted an annual return of nearly 16% over the 25 years to June.
Income and capital growth funds
Meanwhile, Dzmitry Lipski, head of fund research at Interactive Investor, highlights the Artemis Income (0P0000KKC3.L) fund, which "aims to provide investors with a steady and growing income along with capital growth over the longer term."
The fund typically holds 50 to 70 investments, which he says "tend to be stable, well-established businesses with the financial strength to pay solid dividends to shareholders."
Stocks in the portfolio include supermarket Tesco (TSCO.L), clothing retailer Next (NXT.L) and pharmaceuticals firm GSK (GSK.L).
Over one-year the fund has returned 20%, against a 14% rise in the FTSE All-Share tracker, with Lipski pointing out that it currently has a yield of nearly 4%.
Another fund that he said can deliver both income and capital growth is the Fidelity Global Dividend (0P00017LRC.L) fund.
The focus is on high-quality mega-cap companies in developed markets, with stocks held in fund including consumer goods giant Unilever (ULVR.L), analytics company RELX (REL.L) and UK energy network the National Grid (NG.L).
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"The manager adopts a conservative strategy, focusing on companies with clear business models, healthy cash flows and have minimal debt," says Lipski.
The fund has delivered a one-year return of 19%, higher than the 12% generated across its global equity income fund sector. It currently has a yield of nearly 3%, according to Lipski.
The Man GLG High Yield Opportunities (0P0001I6OQ.L) fund is another option for SIPP investors seeking additional income, says the Wealth Club's Moyes. He points out that it is currently providing an inflation-busting yield of 7.5%.
The fund invests in high yielding bonds of companies that have a lower “credit rating” than those dubbed investment grade, which refers to quality of a company's credit.
"Whilst there are additional risks with high-yield bonds, the current environment is seeing investors being well compensated versus history," Moyes says.
He says that Man GLG's team of credit analysts aim to "uncover bonds that might be offering particularly good value".
The fund has generated a one-year return of 18%, ahead of the IA Sterling High Yield fund sector's 12% performance, according to Trustnet.
Capital preservation funds
For those approaching retirement, Wall said that total return funds could be a good option for their SIPP, as they are more conservatively positioned than those that invest fully in company shares.
This type of fund normally invests in a mix of investments, including shares, bonds, commodities and currencies.
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"They could help provide modest growth for your investment portfolio over the long-term, and help shelter your money when stock markets fall, but are unlikely to keep up with stock markets when they rise quickly," Wall explains.
One fund pick Wall highlights is Troy Trojan (0P00002AVE.L), which has generated a return of 6% over the last year. That's ahead of its target to beat inflation based on the UK retail price index, which had grown nearly 3% as of the end of August.
"Manager Sebastian Lyon has managed this fund since its launch in 2001, through a variety of market conditions, testing this fund’s process and philosophy," Wall says.
Investments include short-dated UK and US government bonds, known as gilts and Treasuries respectively, as well as exposure to physical gold through exchange-traded commodities.
The gold price reached a record high in August, with the spot price hitting $2,532 per ounce and has since eased back but remains near highs. Troy Trojan's investment team said the fund's 12% allocation to gold, which acts as a safe haven investment amid uncertainty, had contributed to its year-to-date performance.
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Stocks held in the fund include household-names such as Unilever and Nestle (NESN.SW).
And capital preservation isn't just for investors nearing retirement, as Interactive Investor's Lipski said that trying to limit volatility in your pension portfolio makes sense as we move into a more period of more market uncertainty with upcoming central bank interest rate decisions and the US election in November.
To that end, Lipski suggests investors consider including Capital Gearing Trust (CGT.L) in their pension pot, as it aims to preserve capital over any 12-month period and deliver returns ahead of inflation in the long term.
The investment trust, which has been managed by Peter Spiller since 1982, had produced a share price total return of nearly 7% over one-year as of an August update. The UK's consumer price index, a core measure of inflation, was up 2.2% for the year to July.
Lipski says that the trust's strategy involves a "highly diversified portfolio of assets with some to be negatively correlated to risk assets." This includes index-linked government bonds, which adjust interest and final payments for inflation, which account for around half of the trust's portfolio.
"Such bonds offer protection when stock markets fall, as well as providing a shield against inflation," he says.
"This trust as a good fit as a core holding due to its defensive stance and high levels of diversification," Lipski adds.
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