Managing my own pension – what you need to know
We occasionally meet new clients who want to manage their own pension. This could be for a broad range of reasons ranging from the client being an investment professional to someone who wants to make a very particular investment. Whatever your reason for wanting to run your own pension, you will most likely benefit from having a particular type of structure and being aware of some hard facts.
Before going any further, I feel obliged to caveat this post by saying that unless you have particular experience or professional training, running your own pension or indeed investment affairs is generally a poor idea.
Over the years we have met many people who have seen their wealth decimated by poor decisions mostly of their own making. These outcomes generally hinged around a classic portfolio of leveraged property and bank shares with perhaps a few “deals” thrown in. So if you remain unfazed, let’s take a look at what you need to run your own pension affairs and then some facts and figures that may help put things into perspective.
5 things you need to run your own pension
Money – If you do not have sufficient funds accumulated it will make it very hard to justify the time and expense required to run your own pension. The cost involved in maintaining the structure alone will be prohibitive. We suggest that you will need a minimum of €250,000 in pension assets before the cost of the structure required to run your own pension becomes efficient. This said on a pure cost basis this can become very efficient as larger sums are involved.
The correct pension structure – In order to have true autonomy over your investment decisions you will require a Self Administered structure. This will most likely be in the form of a Small Self Administered Pension fund (SSAP) for company directors or a Self Invested Personal Pension (SIPP) for self employed professionals.
Execution – Depending on what you plan to invest in you will need a means of executing transactions. This may require access to a stock broking service or it may require direct access to those manufacturing investments. Regardless, proper and cost effective execution is a critical component of any self-managed strategy.
Research and knowledge – It is perhaps easy to make a coherent argument for simply buying an index such as the S&P 500 and sitting back and accepting the hand it deals you. But do you know how to do that?
Basic investment theory – you need to have at least a basic grounding in investment before attempting to run your own pension. A couple of rental properties, some Ryanair & Bank of Ireland shares and a little gold does not constitute a diversified portfolio.
3 things you can’t do
We have occasionally met people who want to set up a self administered pension however, upon scratching the surface we have discovered that their motivation was so as they could do something that was in fact prohibited. Here are 3 things you can’t do:
Use my pension fund to buy a home to live in.
Lend money from my pension fund to my business.
Buy an investment property I already own into my pension fund.
All of the above breach a simple but critical principle. All transactions involving your pension fund must be “arms length”. This means that you cannot have dealings with yourself or your business interests or those of you near family.
2 facts about investment and advice:
A recent Canadian study found that Advised consumers ended up with 173% of the final wealth of unadvised even when all starting factors such as education and starting wealth week taken into consideration.
A recent study found that 68% of active equity fund manager and 71% of active bond fund managers failed to beat their benchmark over a rolling 5 year period after costs and charging were taken into consideration. If your plan to use your pension fund and go out and play the markets I challenge you to first write down at least 3 defensible reasons why you can beat the professionals especially in light of their broad under performance. Tip: believing all fund managers are crooks, gangsters or idiots is not a defensible reason. But perhaps saying you plan to track a given benchmark but strip out considerable cost in doing so is so long as you can justify how you are going to do this.
Conclusion
Before deciding to take the plunge and managing your own pension investment you must be absolutely clear on your motivation. Maybe you are an investment professional and prefer to run your own money. Perhaps you have an appetite, capacity and certain insight into particularly high risk investments that cannot be accessed through traditional channels. Perhaps you are an opportunist and have identified certain undervalued assets that you have a very high conviction about. All of these may be good reasons to run your own pension.
For us as advisers the fundamental thing is that you should understand the risks and inherent implications of your actions. A pension is a very long term investment. Investment is something that does not offer reward without risk and risk is very much a two way street.
If you have a well founded reason for wanting to manage your own pension or perhaps are looking to take advantage of a self administered structure and also take advice, SMP can assist in providing the required structures.