Wrapping
assets in a SIPP

A solution for your specific requirements and financial objectives?

Unlike a traditional personal pension, a Self-Invested Personal Pension (SIPP) may offer for appropriate investor’s far greater flexibility in terms of the assets that can be held within its wrapper. A SIPP enables investors to spread investment risk across various asset options, but also to select investments that meet any specific requirements and financial objectives set.

When you wish to withdraw the funds from your SIPP, between the ages of 55 and 75 (50 and 75 before April 2010), you can normally take up to 25 per cent of your fund as a cash lump sum, free from tax. The remainder is then used to provide you with a taxable income.

There are also significant tax benefits. The main benefit of contributing to a SIPP is the fact that basic rate tax payments on contributions will be rebated to the fund which effectively means that, within pension funding limits, you can invest part of your income gross. Initially SIPPs and other similar pension plans were exempt from not only tax on contributions but tax on income and capital gains. There have been a number of changes over the years and it is vital that professional advice is taken before considering this retirement planning option.

A vast array of investments can be held in a SIPP to meet the objectives of your investment strategy. Some of these funds are more common than others, and some are very complex.

Investments include:

• UK and foreign equities
• Collective investments such as unit trusts and investment trusts or OEICs
  
• Offshore Funds
  
• Cash
  
• Gilts
  
• Bonds
  
• Commercial property (under review)

Types of funds available
Broadly, funds can be categorised into two main groups: Conventional, such as equity and bond funds, and Alternative funds.

They can also be categorised by other criteria such as:

Types:

• Open-Ended Funds (OEICs)
• Closed-Ended Funds
  
• Exchange Traded Funds (ETFs)
  

Investment themes:

• Emerging Markets Funds
  
• BRIC Funds
  
• ‘Frontier’ Funds
  
• Specialist Funds
  
• Ethical Funds
  
• Gold
  
• Oil
  
• ‘Soft’ Commodities

Unlike individual shares or bonds, funds allow an investor quick access to a diversified portfolio, even with smaller investment amounts. They also allow investors access to illiquid asset classes, such as private equity, commercial property and commodities.

Types of funds
Open-ended funds
Unit trusts and open-ended investment companies (OEICs) are the most common type of open-ended funds. Open-ended means that the number of units, or shares respectively, in these funds increases and decreases depending on the level of new investments and redemptions. When you buy into an open-ended fund, new units are created. Conversely, if you sell, those units are cancelled. The value of these shares or units directly reflects the value of the underlying portfolio.

Closed-ended funds
Investment trusts are an example of closed-ended funds. They typically issue shares which are then traded on a stock exchange. The number of shares is fixed. This means the value of the shares reflects both the “net asset value” of the fund’s underlying portfolio and the supply/demand for the fund’s shares. As a result, a closed-ended fund’s shares can trade either at a discount or premium to its underlying net asset value.

Exchange traded funds (ETFs)
ETFs are funds designed to track indices. They are a hybrid between open-ended and closed-ended funds. They are open-ended as their number of shares is not fixed, but have characteristics of closed-ended funds, such as listing on an exchange and intraday dealing. They normally fully replicate the index they track, by holding all the constituents in their respective index weightings.

Emerging markets funds
These funds aim to give investors exposure to stock markets in emerging markets economies either on a global basis or in specific regions, Eastern Europe for example. Emerging economies are considered those that have a low-to-mid per capita income, have ongoing economic development and reform programs, and are considered to be fast growing economies.

BRIC funds
In fund management jargon ‘BRIC’ stands for Brazil, Russia, India and China. ‘BRIC’ funds generally have the remit of providing exposure to only these four emerging economies.

‘Frontier’ funds
Frontier funds allow investors to gain exposure to those economies classified as ‘frontier markets’. Frontier markets are generally defined as those markets that tend to have a smaller capitalisation, fewer traded securities and are less liquid than emerging markets. Countries within this frame can be at different levels of economic development, with gross domestic product per capita ranging from low, in countries such as Vietnam and Nigeria, to high, in the Gulf countries for example.

Specialist funds
Funds can provide a way of outsourcing to a specialist investment manager. Specialist funds are funds that invest in a particular area or sector. For example, instead of buying a number of holdings in UK banks, an investor can buy a specialist financials fund managed by someone who is better placed to select the best mix of bank and financial stocks from a global perspective.

Ethical funds
Ethical, or socially responsible, funds typically either look for companies that are actively pursuing ways of improving health and the environment, or avoid companies that they consider have a negative effect on society.

Exposure to gold via funds
An investor can gain exposure to gold via ETFs designed to track the gold price, or via specialised funds investing in companies with gold exposure, such as mining companies.

Exposure to oil via funds
An investor can gain exposure to oil via ETFs designed to track the oil price, or via specialised funds investing in companies exposed to oil, such as exploration, development, production and servicing companies.

‘Soft’ commodities
‘Soft’ commodities is another term for agricultural commodities, such as wheat, cotton, palm oil and orange juice. An investor can gain exposure to soft commodities via ‘agricultural’ funds. These can either invest in future contracts on soft commodities, or in companies that are involved in, related to, concerned with, or affected by agriculture and farming related issues. Investors can also gain exposure to individual soft commodities by buying ETFs designed to track the price of single commodities.