SIPP, ISA or both?
As a qualified chartered accountant, Leah* is all too aware how tax can eat into the value of people’s savings and investments.
When it comes to her own money, she wants to make sure it is invested as tax-efficiently as possible, and this was one of the reasons she opened a SIPP with EQi.
Leah, who is 47 and lives in Richmond, London says: “I had a company pension with my previous employer. But when I left to pursue a freelance career I wanted to make sure I was still saving for my retirement, as well as getting the appropriate tax relief on these contributions.”
The tax breaks are definitely worth having, she adds. After having children Leah didn’t work for a number of years. But she was still able to invest up to £2,880 a year into a SIPP, and claim basic rate tax relief on top. This effectively boosts the contribution to £3,600. As she points out what other kind of investment gives you that kind of uplift on day one?
However, she says the realities of being a parent means there is less money to invest, and she hasn’t always been able to maximise payments each year. She adds, “The children are slightly older now, so I am working a bit more and looking to boost the contributions into my SIPP. With a SIPP, I can choose exactly what shares or funds to buy... I had done this with my ISA previously and it had certainly done a lot better than my workplace pension!"
Choosing to take control
As Leah already had an ISA with EQi, she decided to open a SIPP with them as well. Holding both investments on the same platform makes it easier to keep track of what these accounts are worth, and where the underlying assets are invested, she says.
Leah explains that one of the advantages of a SIPP is that she gets to take control over where her money is invested. This wasn’t always the case with a workplace pension. “Here the choice was far more limited. But with a SIPP, I can choose exactly what shares or funds to buy. I had done this with my ISA previously, so felt confident making these decisions about my pension investments. My ISA had certainly done a lot better than my workplace pension!”
Being comfortable with risk
When it comes to both her SIPP and her ISA, Leah invests in individual shares, rather than funds. “I have never been as keen to invest in funds, as charges can be higher. Also I want to make the decision on where my money is invested, not hand this over to a fund manager.”
However, Leah says she follows quite diverse strategies when it comes to investing via her SIPP and ISA.
“With a SIPP this is clearly a longer-term savings plan. But it is a core part of my savings and investments. I am hoping it will help fund my retirement, so I don’t want to take too much risk with this money.”
To this end, she adds that her SIPP is mainly invested in larger blue chip companies that have a solid track record of paying decent dividends.
In contrast, she has invested in some smaller companies through her ISA, including some which are listed on the Alternative Investment Market (AIM).
“These are a bit more risky,” she comments, “but I feel more comfortable taking more of a gamble with some of my ISA, as this isn’t my retirement money.”
Dividend boost
So what shares does she invest in? Leah says that within her SIPP she invests in the telecommunications giant BT, and also has holdings in Lloyds Banking Group and the food services company, Compass Group.
All of these are well established companies that pay regular dividends to their shareholders. Leah reinvests the dividends to help boost returns over the long term.
BT, for example, is currently yielding around 6.7 per cent, while Lloyds pay a yield of 4.92 per cent. Compass Group has a smaller yield - at 1.99 per cent - but Leah points out it has enjoyed strong share price growth over the past decade.
Leah aims to have a “buy and hold” approach. “There are costs to buying and selling stocks, and it is difficult to get the timing right. This is another difference between my SIPP and ISA. With the ISA, particularly when I first took it out, I did chop and change holdings more regularly. With my SIPP, I’m looking to add good quality stocks that I can hold for the long term.”
Leah says she tries to research stocks thoroughly before buying, to check a company’s dividend record, its cash balance and how its share price has moved over the longer term. “I’ll look at the financial section of newspapers for tips, as well as online sites” she adds.
When it comes to her ISA, Leah surmises she has taken more risk and will invest in smaller shares. Current holdings include oil and gas mining companies, such as Sirius Minerals and Centamin Egypt. Although, she says, she does also hold larger FTSE stocks, such as Lloyds and Vodafone, for a bit of balance.
A Self-Invested Personal Pension (SIPP) can help boost your retirement income. Take control of your retirement pot and benefit from up to 45 per cent tax relief.
*Customer's name has been changed.