Self Invested Personal Pensions (SIPPs) offer the ultimate in flexibility for those who want to take charge of their financial future.
With a DIY portfolio held inside an SIPP, you can enjoy the tax advantages of an old-fashioned personal pension at a much lower cost.
With index funds you can access all the important asset classes for a fraction of the cost of expensive funds.
In particular, Exchange Traded Funds (ETFs) – index trackers that you can trade like any share – enable you to build a flexible diversified portfolio with just a few clicks.
This way more of your money goes towards your wealthy retirement, rather than paying the salaries of expensive managers who studies have proven probably won't beat the market anyway.
1) A passive portfolio of ETFs makes for a simple yet powerful pensionA passive ETF portfolio that's diversified across the main asset classes enables you to enjoy all the long-term wealth creation potential of global equities, balanced by safer holdings in bonds and cash.
Your portfolio can be as sophisticated as you like. You can add commodities, property, and gold ETFs, or you can keep things simple. SIPPs are allowed to hold a far wider range of investments than ISAs (although exactly what you can hold does vary by SIPP provider) so you won't lack choice.
justETF's Strategy Builder makes it easy get started with an approach that's right for you.
Managing your portfolio needn't be a chore, either. Rebalancing annually or when things move too far out of line will only take a few minutes, and you can easily do it yourself.
Again, justETF can tell you what you need to buy and sell to stay on target.
2) ETFs are cheap to hold and tradeWhen you're saving and investing over several decades before retirement, compound interest makes a huge difference to how much you end up with.
The returns you compound over the years will be determined by three things – the returns from the assets you hold, the costs of investing in those assets, and any taxes along the way.
You can't control the markets, but by controlling your costs, you can improve your returns. ETFs tracking major indices in the US, UK, Japan and Germany can cost as little as 0.05% a year to own.
Also, with ETFs it's up to you when you trade, so if you're starting out with small sums you can allow your pension contributions to roll up for a few months and then invest quarterly instead of monthly to further cut costs.
Of course there are no income taxes on dividends or capital gains payable inside a SIPP. There's also no stamp duty tax paid on ETF purchases.
3) You can easily adjust your ETF portfolio as you ageThe ideal portfolio for a 30-year old is not the same as for a 60-year old.
As we age we typically want to take less risk on equities and hold more safe assets like bonds. We're closer to spending our savings, and we have less time and earning years ahead of us to recover from a stock market crash.
Because ETFs are cheap and easy to trade, adjusting your asset allocation as you age is straightforward. You can reduce your exposure to equities and add to your bond ETFs in a matter of minutes.
4) You can make tactical allocation decisionsEven if you take a more active investment approach to the markets you'll also find an ETF portfolio a boon.
Think the US market looks expensive? Reduce your US holdings and add to ETFs tracking the indices of countries you believe are cheaper.
There's no risk of a remote fund manager taking chances with your pension in a bubbly stock market when you're in charge!
5) ETFs can deliver a retirement income, tooWhile the recent pension changes mean we're now free to spend our pension savings most sensible investors who've taken a lifetime to grow their assets will want to use them to generate an income to live on.
ETFs can again provide a solution, as many pay an income.
As you approach retirement you can switch to more income-orientated ETFs – or simply swap your accumulating ETFs for distributing versions instead of buying an annuity or some other costly financial product.
And if you do want to draw on your capital, you can sell down your ETF holdings as required.
Naturally you will need to make sure you're balancing income and security. The screening tools can help with your research.