SIPP slips: Five mistakes contractors make with the popular pension

Self-Invested Personal Pensions (SIPPs) have become a go-to retirement savings vehicle for many contractors in the UK. Offering greater flexibility and control over investments, SIPPs enable contractors to tailor their retirement portfolios to their specific needs and goals.

However, the freedom and versatility of SIPPs also come with the risk of making costly errors if not managed properly, writes Hrishi Kulkarni, managing director of iSIPP.

Here are five common mistakes SIPP contractors make with the popular pension -- and why they ought to be avoided:

1. Neglecting regular contributions

Contractors with variable income may find it challenging to make regular contributions if their workflow varies over time.

However, making ad hoc, lump-sum contributions to your SIPP while neglecting regular, smaller instalments can significantly hamper long-term growth. The power of compounding rewards consistent contributions, allowing even small, regular investments to accumulate substantial savings over decades. Make sure to budget contributions as a fixed, mandatory expense in your cash flow planning.

2. Failing to diversify investments

Some contractors make the mistake of investing heavily in their own industry or company stock due to familiarity. However, excessive concentration in any single asset amplifies risk.

Market downturns affecting that asset can then devastate your entire retirement portfolio. Instead, diversify across varied asset classes like equities, bonds, real estate, and others that don't closely correlate. This balances risk and reward. Also, rebalance periodically to maintain target allocation.

3. Lacking a cohesive investment strategy

The flexibility of SIPPs allows endless investment choices. Without a well-defined investment strategy, ad hoc decision making can lead to performance-chasing, excessive trading, and other detrimental behaviours.

So, have a clear game plan for building a prudently diversified portfolio aligned with your risk appetite and return objectives. Strategic asset allocation is key.

Then, review investment strategy periodically to ensure appropriateness amid changing market conditions.

4. Overlooking the need to monitor investments

‘Set and forget’ can be detrimental with SIPPs.

Frequent portfolio reviews are vital to ensure proper asset allocation, adjust to market shifts, rebalance holdings, liquidate underperformers, and realign with goals.

Conduct regular investment reviews, at least quarterly. Keep abreast of economic trends affecting portfolio assets. Course-correct promptly when needed.

5. Shunning professional investment advice

Some contractors manage their SIPP investments themselves to avoid fees. But if there is a lack of requisite expertise this could lead to suboptimal decisions.

The input of qualified financial advisers can aid immensely in strategising retirement goals, constructing a prudent investment portfolio, and selecting the most appropriate assets for your needs. The fees for such guidance may pay for itself many times over by preventing costly missteps.

By sidestepping these common pitfalls, contractors can maximise the potential of their SIPPs and avoid jeopardising the retirement lifestyle they desire.

Managing a SIPP requires diligence, discipline, and expert guidance. With the right oversight, SIPPs can pave the way for achieving your retirement aspirations.

Find out more about iSIPP here.

Disclaimer from the author – iSIPP:

As with all investing, your capital is at risk. The value of your portfolio with us can go down as well as up and you may get back less than you invest. We do not provide investment advice.

iSIPP is a trading name of iPensions Group Limited registered in England and Wales with Company Number 03683070 whose office is at 2nd Floor, Marshall House, 2 Park Avenue, Sale, M33 6HE. Authorised and regulated by the Financial Conduct Authority, Licence Number 464521.