Investing freedom — but inside a pension

It can hardly be a surprise that UK consumers are feeling the pinch. Nevertheless, the Financial Conduct Authority (FCA) has commissioned a survey to pinpoint quite how much consumers are feeling the pinch.

The answer: a lot. A whopping 14% of those surveyed — equivalent to 7.4 million people — had struggled to pay bills or make credit repayments in January.

Granted, that’s better than the position in January 2023, when some 10.9 million people reported similar difficulty, but it’s still an awful lot higher than in February 2020, before the present cost-of-living crisis began.

Beyond that, the FCA press release doesn’t say much. So full credit to the Financial Times for digging into the detail of the numbers, and reporting a finding that’s both pleasing and surprising.

Cut the pension contributions last

What do people typically do when experiencing severe financial pressures? In addition to looking to reduce household costs, they tend to cut back in terms of saving and investing, usually. I’ve done it myself, in times gone by.

But the FCA’s survey highlighted some rather different behaviour.

Yes, consumers were indeed cutting back on non-essential spending and reducing their energy bills. But almost no one — just 3% of respondents, actually — had stopped or reduced their pension contributions.

Reality may finally be dawning, in other words: in retirement, we’re increasingly responsible for our own standard of living. You can’t retire to a champagne lifestyle if you’ve only made beer money pension contributions.

One size might not fit all

Now, it’s admittedly dangerous to read too much into broad brush statements about ‘pension contributions’. But taking the survey finding at face value, it’s certainly welcome news.

Yet how many of those pension contributions actually gave people the investment choices that they wanted, at an acceptable cost?

For Britain’s pension industry still has — at least in my view — too many fat and comfortable firms delivering anaemic returns while charging high fees. Fees that are in many cases totally uncapped: the percentage charged might decline as pension pots mount, but the upward rise is nevertheless inexorable.

And all while providing pension savers with all too little information — or control — in terms of quite what their retirement savings are invested in.

In short, it’s great news that people are maintaining their pension contributions — but not quite so good news that they might be cutting back in terms of the other investing decisions — in respect of ISAs and brokerage accounts — that might actually deliver the financial goals that they have in mind.

Is a SIPP the answer?

The obvious question: is there a way of combining the two approaches — creating tailored, cost-efficient, personalised investment decisions, all within a pension wrapper that people will still want to continue contributing to, even in straitened times?

The answer: yes.

There is an alternative — an alternative that should be attractive to many Motley Fool readers. But sadly, all too few people are aware of this alternative.

SIPPs — Self-Invested Personal Pensions — aren’t new. They’ve been around for decades.

And the basic idea is simple: they’re a pension ‘wrapper’, into which savers can put all kinds of investments — funds, certainly, as they’d invest in when using ‘traditional’ pension products, but also individual companies’ shares, REITs, bonds, gilts, and investment trusts.

As the ‘self-invested’ part of the name indicates, you’re totally in control: you’re not paying high-priced advisers, you’re not paying the hefty overheads of storied City fund management firms, and you’re making your own investment choices.

Pension investing your way

The key advantage — apart from the potential for lower fees — is that a SIPP gives you the flexibility and ability to conceive and execute your own investment strategies.

A given share looks cheap? You can buy it. A dividend stalwart is on an advantageous yield? You can buy it. You want to increase your exposure to American shares? You can. Bonds? Gilts? Again, you can.

You’re not tied to one investing strategy, or one fund manager’s views, or the funds of one single pension plan provider: you can literally do almost anything you like.

And — generally — pay less into the bargain, in terms of fees. Certainly so, I’d suggest, as your pension pot gets sizeable.

The best of both worlds

In short, it’s a way of buying shares — and other asset classes — in a way that’s just as flexible as a normal brokerage account or ISA, but which confers retirement advantages, as well as benefiting from tax relief on contributions. What’s not to like?

In hard times, you might have to cut back on paying into the ISA – but you can have the same freedom of choice in the SIPP.

Certainly, I’ve very much appreciated that freedom within my own SIPP, opened many years ago.

Where to buy a SIPP? There’s no shortage of providers, but I’d start with the big fund and share supermarkets and low-cost brokers. There are pricier upmarket options, but the market majors are certainly a good place to start.