Just because you can to something, doesn’t mean that you should. We’ve all heard that before, but does it apply to pensions?
Self-invested personal pensions (SIPP’s), have been around for a long time allowing investors to choose their own investments to build a retirement fund and ultimately to provide an income once their working life stops or they start to work less.
When SIPP’s first appeared around twenty years ago they were presented as complicated, requiring the help of a financial adviser to set up and administer. They were primarily intended for self-employed professionals who did not have access to a company pensioned the valuable benefit of employer contributions.
In recent years providers have promoted SIPP’s to the wider market as a “do-it-yourself” pension. The idea is, that you take control of your own investments and financial future.
Is this a good idea for investors?
Is this really going to work out well for investors or does it have the potential to turn out badly? In many cases I think not, and there are going to be many disappointed people, looking for someone to blame when it all goes wrong.
It’s a bit like this….
Most people know what is required to build a house. They know that foundations are required, followed by brick walls, windows, followed by the roof. But just because you know the fundamentals of how to build a house, does that really mean you should build your own?
I think most of us would agree, we know basically what to do when it comes to building a house, but we wouldn’t dream of doing it. We’d leave that to the experts. Sure, we could possibly save some money building our own home, but for most of us, the risks of getting it wrong far outweigh and potential saving we may make.
Yes, most of us would decide to buy a home or instruct a construction company to build one for us. It’s just a far safer and reliable option. All sort of protection is in place to protect us not only from the unscrupulous, but also to stop us making mistakes ourselves, that could be very costly.
DIY or use and expert?
So, the question is this. Do most people have the expertise required to build a retirement fund to provide them with a sustainable income once work comes too and end?
For most of us the purchase of a house and building up a good sized retirement fund are probably the 2 biggest financial designs and commitments in our lives.
There is now a growing trend for people to build their retirement fund themselves. The investor makes all the investment decisions for themselves, without taking any professional advice from a financial advisor.
The big question
The big question is this. If you make your own investment decisions without seeking any advice and it all goes wrong, who should take the blame? The investor or the SIPP provider?
With the rise of DIY planning and the encouragement by some that we can do all this financial planning ourselves, we are now seeing providers of these types of pensions being accused of not looking after the investors best interests.
In a recent case, a DIY investor instructed the SIPP provider to invest in Sustainable AgroEnergy, which they duly did. However, as it turned out, the company acted fraudulently, and the investor lost part of his pension fund.
The question that is quite rightly being asked is this. If an investor is choosing their own investments entirely, many of which are unregulated, who should take responsibility if it all goes wrong?
The risks can be very high
The concept of using a SIPP is to be able to access any of the many thousands of investment options many of which will be regulated, but many of which will not be. For example, direct equities are not regulated like an investment fund. So, the risks can be very high indeed.
As SIPP’s become more and more popular, more and more investors are finding that they are losing money due to poor investment decisions, whether that be due to fraud or otherwise.