Wednesday 4 May 2011

The Next Investment for the SiPP (UK)

Most people know that the government will give you back tax if you save in a pension. I described in a previous post how even  non-workers can recover tax (even if they haven't paid any income tax recently). So, not only can a non-working spouse hold the couple's savings - and pay no tax on the interest (up to their personal allowance) - but they can also pay into a pension, although the amount is limited. As I noted before, this results in an instant 25% return.

I now need to decide how to invest this 'grossed-up' amount...

My spouse's SiPP  has recently received the government's (read 'tax-payers') £720, on a payment of £2,880 - the maximum allowed. This brings the total amount to invest up to £3600. What is the best way to generate income?

As readers of the DIY Income Investor will now be aware, there are the following main possibilities:
  • Government bonds - 'gilts' or 'treasuries'
  • High-yield dividend shares
  • Corporate bonds
  • ETFs specialising in any of the above

In another post I highlighted the possibility of high-yield PIBS (Permanent Interest-Bearing Shares), particularly one of those offered by Nationwide Building Society, offering a yield of around 7.5%.

The characteristic of this SiPP is that, as the amount we can put in each year is limited, it is a relatively small total fund, compared to our ISAs - where we can put in nearly three times the investment (although not with the nice tax refund). I don't really want to lose a lot of money on an investment in this account, as it will hurt the whole pension fund!

The investment amount (£3,600) is also relatively small, which rules out many (but not all) corporate bonds and PIBS, which are usually traded in larger amounts.

Also the SiPP provider will inevitably have a limited range of investments on offer.

My short-list is therefore:
  • perpetual gilts: the highest-yielding gilts are perpetual Consolidated 4% (CN4), which are traded in small amounts - current (early April 2011) gross income (and redemption) yield (according to Bondscape)  of 4.75%
  • perpetual corporate bonds: these are offered by several banks, and again are tradeable in small amounts e.g. HSBC, Standard Chartered, Barclays - current yields around 7-7.5%, , e.g. HSBC 8.208% perpetual (EHS5), with an income yield of 7.53% and a redemption yield of 5.61%
  • high-yield shares: I've recently reviewed the pick of the 5% yield club, of these, I'm noticably underweight in Cable & Wireless Worldwide (CW.), yielding more than 5% but the recently-hived-off company is struggling a bit, so this might be a bit risky

Alternatively, ETFs are available in small amounts and are diversified, so are suitable for a small pension fund. I recently purchased IUKD (high-yield dividend shares) and ISXF (non-financial high-yield corporate bonds) - both have a reasonable yields (IUKD, 4.54% and ISXF, 4.51% and both have gone up in value (IUKD by 6.5%!).

So, the 'boxes to tick' are:
  • low risk
  • high yield
  • tradeable in small quantities
  • available to trade in the SiPP

So, there (I think) are the options - what do you think?

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

No comments:

Post a Comment