December 14th, 2021
Why taking a DIY approach to your pension could cost you thousands
Retirement is traditionally seen as an opportunity to relax and enjoy the rewards of all your hard work. You may already have an idea about the kind of things you want to do in this chapter of your life, whether that’s taking long holidays or spending more time with your loved ones.
With that in mind, it’s important that you have enough wealth to support the lifestyle you want when the time comes to retire. That’s why you need to be careful about how you manage your pension wealth.
As you may know, self-invested personal pensions (SIPPs) offer a high degree of flexibility, which can make them attractive to many people. However, if you aren’t able to make an informed decision when investing this wealth, it could cost you a large amount of money.
If you’ve ever tried DIY and had something go wrong, you’ll know how expensive it can be to make a mistake. That’s why, if you’re considering a SIPP, seeking advice first can really benefit you.
SIPPs can offer a high degree of flexibility, but can have some drawbacks
Ever since Pension Freedoms were first introduced in 2015, there has been a greater shift towards individual responsibility for pension management. Due to this, it’s understandable why some people might be attracted by the high degree of control that SIPPs can offer.
Unlike workplace pensions, where your money is typically invested on your behalf, these personal pensions often give you a high degree of flexibility. They often give you the option to invest in a wide variety of assets and schemes, such as:
- Unit trusts
- Stocks and Shares
- Gilts and corporate bonds
- Investment trusts
- Commercial property
Furthermore, you can often interact with your SIPPs through online portals, given to you by your provider, meaning that managing them can be quick and easy.
However, while on the surface this high degree of control can sound very appealing, it’s rarely as simple as it sounds.
You may have to pay higher fees with a SIPP
One of biggest potential drawbacks to using a SIPP is that they typically have higher charges than other types of pension. As you might imagine, this can significantly eat into your wealth in the long term.
If you want to be able to enjoy a comfortable and sustainable lifestyle in retirement, it’s crucial to have enough wealth to support it. That’s why it’s important to ensure that your pension is growing as effectively as possible.
Rebecca O’Connor, the head of Pensions and Savings at interactive investor, was quoted in the Financial Times as saying that the impact of higher fees on pension pots is both “important” but also often “poorly understood”. She said this is largely due to “poor transparency” from providers.
“Unfortunately, the result for some people of paying high percentage fees will be a far reduced retirement income for the rest of their lives. They run the risk of running out of money much sooner than they would have done with a better value pension”, she said.
The prospect of running out of money in retirement can be a worrying thought, but fees aren’t the only reason that it could happen. Another potential issue is that, if you don’t have much experience with investing, you could make a significant financial mistake.
When you invest in a SIPP, not adequately diversifying your assets can put them at risk
Another potential issue that you might have when you use a SIPP is that you will have full responsibility for managing where you invest it. If you aren’t able to make an informed decision about how to invest your wealth, you could make decisions which damage your long-term prospects.
For example, you may not adequately diversify your investments enough to protect them from market shocks. This can mean that you could be at risk of losing a large amount of money in an unexpected market downturn.
A common example of this is where an individual holds their business premises in their pension. It can mean their fund is too heavily weighted in commercial property.
As we discussed in a previous article about how to lower your risk when investing, holding a broad array of assets can help you protect your wealth during periods of volatility. However, while a professional fund manager may be in a position to build an adequately diverse portfolio, an amateur investor may not.
If you aren’t able to properly diversify your assets, you could be exposing your pension wealth to unnecessary risk. If your portfolio experiences a sudden shock, it may put your long-term plans in jeopardy.
When it comes to retirement, it’s important that you have enough wealth to enjoy your desired lifestyle. That’s why, if you’re considering a SIPP, working with a planner can help you to assess whether it’s right for you.
They can help you to weigh up the potential benefits and drawbacks, helping you to make an informed decision about your pensions. This can give you much greater peace of mind to know that you’re making the right decision for your needs.
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A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.