How to choose your first pension investments in a SIPP

Important information -  the value of investments and the income from them can go down as well as up, so you may get back less than you invest. 

A SIPP - or self-invested personal pension - allows you to save money for your retirement with tax relief on your contributions and no tax to pay on any investment returns you make.

But it is up to you to decide how your money is invested. That means choosing between potentially thousands of different options - a daunting task if you are unfamiliar with the world of investment.

Thankfully, the job of picking investments for your SIPP is simpler than you might think - you can do it successfully even if you have no prior experience.

Here we run through the most important considerations when picking your first SIPP investment, with suggestions for where you can get help if you need it.

The money you contribute to a SIPP is invested, and this can be done in several ways. It might be used to buy shares in companies listed on the stock market, or bonds issued by governments or businesses. It might be used to buy commodities like gold, or assets like commercial property or infrastructure projects.

The most knowledgeable investors might be able to pick these investments for themselves but it is far more common to invest instead via collective investments, like funds. Funds hold dozens - sometimes hundreds - of different assets so that you don’t have to decide for yourself which ones to buy. They allow you to easily diversify your investments. That’s very important, as we explain below and in our Principles of Good Investing.

A fund might have a particular focus or type of assets it buys, or it might hold many different types.

For someone looking to make their first SIPP investment, it can make sense to choose just one fund where all the diversification you need comes as part of the deal. As your confidence and understanding builds you can add more funds if you wish - but remember you don’t have to.

Your SIPP investments should be diversified with money split across different types of assets, so you have some protection if any individual asset suffers big falls. It doesn’t mean you can’t still lose money, but the aim is to reduce that risk.

By picking a fund that invests globally, you will be buying assets from many different regions of the world, reducing the risk that trouble in one market means your whole portfolio suffers.

Some funds will diversify your money across different types of assets as well, if that’s what you want. For example, a fund might hold a chunk of your money in shares - where the risk is higher but returns have historically been better - with the rest held in lower-risk bonds, cash or alternative assets like gold.

One decision you have to make as an investor is how much risk you want to take with your investments, and therefore the split of assets that suits you. But this doesn’t have to be complicated.

One very simple way to find a fund that matches your appetite for risk is to use a tool such as Fidelity’s Navigator - you can find it here.

Navigator asks first whether you want a fund that aims to simply grow your money or one which pays regular income. If you’re investing inside a SIPP during your working life and you don’t yet need an income, it’s the growth option you want.

You can then choose whether you want a fund which is invested in line with indexes for a lower cost, or one invested according to decisions made by an investment expert for a slightly higher cost. If you take the lower-cost option, each investment held within the fund should perform closely in line with its own chosen market. Your return shouldn’t be much more or less than that.

The option of having investments chosen by an expert means you pay more to invest but have the chance of a higher return - but also a chance that your investments underperform the wider market as well.

Once you have decided which option you prefer you are asked to gauge the level of risk you are comfortable taking. The choice you make then determines which fund will suit you, with riskier options including a higher proportion of shares versus lower risk assets.

• Read: Is my portfolio diversified enough?

When deciding the level of risk you are comfortable with, it is important to also bear in mind the length of time you have before you’ll need to access your investments. There are two reasons why you can probably take on more risk if you have a long time to wait.

Firstly, if your investments lose value in the short term there will be plenty of time for those losses to be recovered. Money held in a SIPP cannot typically be accessed before age 55 anyway (rising to age 57 from April 2028) so there is no need to sell investments and crystalise a loss if they fall in value - you can just wait it out.

Secondly, if you still have many years of SIPP contributions ahead of you, losses now can actually work in your favour because they allow you to buy assets at lower values. This can boost your returns in the long run.

For these reasons, people for whom retirement is still a long way off - at least 10 years - are often comfortable investing their SIPP money entirely in shares. Then, depending on their plans, they may then add other, safer assets to the mix the closer they get to retirement - more on that below.

If you are happy to take that approach, our Select 50 list of favourite funds includes several that provide simple access to a globally diverse range of shares.

The Legal & General Global Equity Index Fund splits your money across world stock markets, putting more money on the biggest markets and less in the smaller ones. It is one of the simplest, cheapest and most popular ways to invest.

The Fidelity Global Dividend Fund looks for companies which boost their returns to shareholders via regular dividend payments. It is run by a manager who handpicks investments, so there is slightly higher charge to invest.

• See our Select 50’s full list of global funds

Once you’ve settled on a fund, or funds to invest in, you can think about how much you want to pay into your SIPP.

Note - those with an employer-provided pension may have the opportunity to pay into a scheme with the employer contributing on their behalf as well. You should always make the most of any such offer first - saving into a SIPP can come after that.

Knowing exactly how much to pay into a pension is not an exact science. A common starting point is an amount - including any employer contribution - worth 15% of your salary. Remember, however, that if you have been under-saving for many years then you may need to pay in more now. 

Setting up a regular monthly contribution to your SIPP means you can automate monthly payments and then easily tweak them up or down as your circumstances change. You can start with as little as £25 a month.

• Open a SIPP

If retirement is within 10 years, then you may want to reduce the risk you are taking with your investments so there is less chance of your money suddenly falling in value.

Whether this is an issue depends on how you plan to use your money. Those planning on using all their money to buy an annuity - the product that takes your savings and provides a guaranteed income in return - may want to consider shifting gradually out of shares and into bonds, where performance is less volatile and any falls are likely to be compensated for by a higher annuity return in the future.

If the plan is to leave your money invested after retirement to take an income, you may still want exposure to shares, but with a mix of bonds and cash too to prevent your pot suffering sudden falls in the future.

Fidelity’s Navigator range can help here. Or you can make use of ready-made investment options by picking one of four Investment pathways, specially designed for those approaching retirement.

• Read more about Investment Pathways

If you’re unsure, it’s a good idea to take advantage of Pension Wise, the government-backed guidance service. This free and impartial advice can help you understand your options, make informed decisions and avoid costly mistakes. Booking an appointment well in advance will give you time to consider your choices and refine your retirement strategy accordingly. You can access the guidance online at www.moneyhelper.org.uk or over the telephone on 0800 138 3944.

Our team of retirement specialists can also provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.

• Read: Retirement plan checklist: 5 years from retirement
• Read: Retirement plan checklist: 10 years from retirement