EVEN the most adventurous of us might baulk at investing our pension in
Chinese property or Russian equities, but that’s where leading pension
experts are putting their retirement savings.
Pensions have come a long way since the 1990s, when most company schemes gave
you a choice of only a handful of funds and most personal pensions were
invested in the firm’s default with-profits fund.
Since 2006, when the government revolutionised the pensions regime, savers
have been getting much more creative.
Many companies are abandoning traditional money-purchase schemes, where
trustees decide how your cash is invested, in favour of group personal
pensions, which give members an individual pension pot and more choice over
where they invest it.
Meanwhile, self-invested personal pensions (Sipps), which generally give you
access to thousands of investment funds, have soared in popularity: Standard
Life said recently Sipp sales leapt 24% in 2007.
Advisers are taking advantage of this new freedom by investing in exotic
emerging markets, from Qatar to India, with some believing there’s an
argument for investing in risky markets with your pension rather than in an
Isa.
Mark Dampier of advisers Hargreaves Lansdown said: “With an Isa, many people
intend to use the money in five or ten years’ time, to pay their children’s
school fees, say. With pensions, you are generally locking your money away
for about 20 years: you cannot access pension cash until 50, rising to 55
from 2010. Over that time frame, you can afford to take more of a risk.”
For example, if you had invested in emerging markets during the Asian crisis
of 1997 you would have watched their value fall 56% while UK equities stayed
comparatively safe. Over 20 years, however, emerging markets are up 686%
against 465% for the UK.
Here, the experts tell us where they are investing and why.
Mick Gilligan, Killik & Co
Gilligan is in his late thirties and is not expecting to draw his pension for
at least 10 years.
The top holdings in the Killik fund research director’s Sipp are Qatar, Africa
and China. His holdings in the latter are through the China Real Estate
Opportunities fund.
Gilligan said: “I think the long-term outlook for Chinese real estate is
strong. When you’ve got to rehouse millions of people moving from rural to
city living, retail units will see increasing demand. It’s the same story
for office space. The vacancy rate in Shanghai for offices is about 1% or
2%.”
He is getting exposure to the Gulf region through Epicure Qatar, which is
listed on London’s Alternative Investment Market (AIM). The fund, which
launched in July last year, has returned 15% over the past six months alone,
despite the global credit crunch, while the Doha Securities Market is up
185% over five years.
Gilligan said: “Qatar is one of the world’s fastest-growing economies. I like
this fund as you don’t have to lock your money away – it is one of the few
liquid funds in the region.
“I also like New Star’s Heart of Africa fund, which has returned 10% since it
was launched in November.”
Anna Sofat, Addidi
Sofat is 45 and does not intend to draw her pension for another 20 years. She
has invested her Sipp in infrastructure and commodities, including the
Merrill Lynch Gold and General fund, although she would steer clear of
energy stocks.
Her infrastructure holdings include Macquarie Infrastructure ishare which
tracks the performance of 30 companies that invest in infrastructure from
toll-roads in Europe and Africa to railways in Asia, including National
Grid, Spanish energy giant Iber-drola and Suez. Sofat, a director at Addidi,
also has a stake in ethical funds which she expects will do well in the
long-term.
“I like them on a personal basis, they make me feel good,” she said. “But I
think clean technology funds such as King & Shaxon Green will do very
well. We simply have to develop alternative energy and cleaner technology.”
Sofat has also invested in the Quadris Forestry fund, which specialises in
Brazilian teak plantations, and allows a choice of a fixed income rate.
In another contrarian move, she has invested about 5% of her pension in debt
issued by emerging countries such as India and Brazil. Ten years ago, when
such nations were in the grip of a currency crisis, this would have been
unthinkable, but shows just how far they have come.
“India and Brazil have got decent surpluses now whereas 20 years ago you would
have been worried about their ability to pay it back,” she said. “Sovereign
debt has become safer than equities as emerging markets have got richer.”
Mark Dampier, Hargreaves Lansdown
Dampier is 51 and has no immediate plans to retire. His Sipp holds
emerging-markets equities, with about 15% in Russia, as well as a range of
hedge funds to balance the risk.
Dampier, head of research at the adviser, said: “I don’t think you want too
many holdings. I have about 18 in all. Neptune Russia looks like a cheap buy
at the moment, and I have about 6% in Nevsky Global Emerging Markets, which
is up 26% over the past year.” He also holds hedge funds including Cazenove
Absolute Equity, which is up 10% over the past year.
“Some people think of hedge funds as high risk, but not the sort I’ve bought.
The funds that tend to blow up have huge amounts of debt. A proper hedge
fund aims to produce positive returns in both rising and falling markets,
and is therefore a great way to preserve your retirement savings.”
He also likes Blackrock Absolute Alpha, which is available to everyone whereas
you generally need more than £100,000 to get into a hedge fund.
Justin Urquhart Stewart, Seven Investment Management
Urquhart Stewart, 53, has no plans for retirement. His firm recently switched
from a company money-purchase scheme to a group Sipp, and he takes full
advantage of the added freedom.
He has about 80% in the default fund – a multi-manager scheme consisting of
35% equities, 32% bonds and gilts, about 8% cash and other assets. The rest
is in a diverse range of assets.
For example, Barclays shares make up 5% of his portfolio, despite the stock
suffering falls of more than 30% in six months.
He said: “This is a higher level of risk that I wouldn’t ask clients to take,
but I worked for the company for several years so I feel comfortable with it.
“Another stock I have is Feonic, a small high-tech business listed on the Plus
market and based in Hull, which specialises in designing audio technology
ranging from loudspeakers and noise-cancelling windows. I think it has great
potential.”
He has also dipped into PME African Infrastructure, which invests in projects
such as railways which are sponsored by the Chinese to help move commodities
round the continent.
He also likes the Goldman Sachs International Warrants Bric FX fund, which
provides exposure to the Russian rouble, Chinese and Brazilian and Indian
currencies.
He said: “This is also high risk, but I am investing on the basis that these
currencies are likely to strengthen against sterling in the next three years.
“At the moment the stocks I’m not picking myself are making more money but
that’s okay – I feel my core pension should be steady and have low
volatility.
Tom McPhail, Hargreaves Lansdown
McPhail, 41, doesn’t want to draw on his pension for at least 20 years. He has
topped up his Sipp as prices have fallen following the credit crisis.
His core holding, about 20% of his portfolio, is in UK income funds such as
Neil Woodford’s Invesco Income, but he also has 15% in Jupiter Ecology “to
salve my environmentalist instincts”.
Pensions chief McPhail also has Melchior Asian Opportunities, Eclectica
Agriculture, the Hargreaves Lansdown Special Situations trust and Skandia
Global Best Ideas.
He said: “All of these have had a rollercoaster year, with falls of up to 30%,
but I am happy to hold them for the long term.”
HOW TO SWITCH FUNDS
I am in a company pension scheme. How much freedom do I have?
With a traditional money-purchase scheme, where trustees make the decisions,
you can generally choose between just a handful of funds, and are allowed
one free switch between funds each year. If your firm offers a group
personal pension, run by a life insurer, you usually have a wider choice and
can switch as often as you like – within reason. There may be a fee,
however.
What about Sipps?
Self-invested personal pensions give you more investment freedom. Many
companies that previously offered group personal pensions are moving towards
group Sipps. For example, Legal & General was recently appointed to run
a group Sipp for Glaxo Smith Kline, with access to 280 funds on the market.
It might be worth lobbying your pension administrator or human resources
department for more freedom.
I am in a final-salary scheme. What about me?
Final-salary schemes generally offer no freedom to choose how your retirement
savings are invested. However, since 2006, you have had the option to set up
a Sipp alongside your company scheme if you want to make additional
contributions. Always take advice before you move out of a final-salary
scheme as you are giving up a guaranteed benefit.
I have lots of schemes from previous employers. How do I transfer them?
Contact the administrators to find out how much the pension rights in a scheme
are worth. They will quote you a transfer value.
WHAT TO DO IF YOU ARE CLOSE TO RETIREMENT
WHILE it is all very well to take big risks with your pension if you are not
planning to retire for 10 to 20 years, the advice is completely different if
you have fewer than 10 years to go.
Advisers said you should gradually move out of risky equities into bonds and
cash to reduce the risk that a big fall in share prices will reduce the
value of your fund – and therefore the amount of income you get in
retirement.
Many money-purchase company plans automatically move your money from shares to
cash in the run-up to retirement. If yours doesn’t, you can usually request
a move of part or all of your fund into a cash fund: personal pension savers
can do the same.
Investors in final-salary plans need not worry as payouts should remain
unchanged.
