Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Where to invest your SIPP cash windfall
Many individuals with SIPPs (self-invested personal pensions) are likely to enjoy a cash windfall in late May as tax relief from HMRC relating to the previous tax year is paid into their account.
In this article we will examine why many investors will see cash drop into their account now and offer some suggestions for how you may consider allocating this cash in the markets.
HOW DOES THE SYSTEM WORK?
When you make contributions to a personal pension the administrator of your pension scheme, typically your pension provider, will claim basic rate (20%) tax relief on your behalf.
Taxpayers in the higher (40%) and additional (45%) rate tax brackets must claim their own extra relief personally through their tax return.
With some providers, often big insurance firms, you receive your tax relief immediately because they have sufficient capital to pre-fund these sums before they receive the cash from the taxman.
However, outside the biggest firms pre-funding isn’t the norm, so you only receive the relevant relief once it has been paid by HMRC.
WHEN DOES THE CASH ARRIVE?
Your SIPP provider collates the details of all those customers who have made a personal contribution in a tax month and then gives HMRC a single figure for all the contributions received.
HMRC in turn sends the tax relief to your provider for all those customers in a single payment. After this process is complete the funds are paid to customers’ accounts.
For a variety of reasons many of us wait until the final month of the tax year, running from 6 March to 5 April, to make contributions to our personal pensions.
This could be due to a natural tendency to leave things to the last minute or because we are waiting for clarity on our earnings and
If you contribute in this period, then your scheme administrator has until 30 April to make the claim to HMRC for the relief, which is then paid on 21 May and will usually appear in customer accounts a day or two later.
So what should you do with this extra cash? Let’s now look at five investment ideas spread across funds, investment trusts and stocks. As always; our ideas are designed to give you inspiration and a platform for you to go off and do further research. They may not be suitable for everyone due to different investment time horizons and risk appetite.
TWO FUND IDEAS
Royal London UK Equity Income (GB00B8Y4ZB91) BUY
Figures from Seven Investment Management show that so far in the 21st Century the FTSE 100 has delivered a return of 12% without dividends but once dividends are reinvested this return is almost 10 times as large at 114%.
For long-term investors it therefore makes sense to have an income-focused fund in your portfolio and to buy the ‘acc’ version which rolls up dividend payments so you own more fund units.
Royal London UK Equity Income, which trades on an historic yield of 3.9%, has been managed by Martin Cholwill since 2005. It is a top quartile performer on a three and five-year view. Cholwill focuses on companies with robust balance sheets which are sufficiently out of favour to enable them to be bought at a higher yield than that offered by the wider market.
Baillie Gifford Japanese (GB0006011133) BUY
There may have been a recent pause for breath in Japan’s strong growth run but Japanese companies are becoming more shareholder-friendly and this bodes well for the long-term returns for those funds which invest in this market.
Managed by a strong team, Baillie Gifford Japanese invests in a focused portfolio of between 45 and 65 names and adopts a patient, low turnover approach.
Included are a diverse collection of names which typically stray a long way from the benchmark. This fund has consistently delivered top quartile performance. More prominent names in the portfolio include tech firm Softbank and car maker Toyota.
TWO INVESTMENT TRUST IDEAS
Aberdeen Diversified Income & Growth Trust (ADIG) 121.4p BUY
Although historic performance has been patchy this trust has performed better of late under co-managers Mike Brooks and Tony Foster.
They took the helm in February 2017 with a long-term approach based on investing in a diverse collection of assets including private equity, listed equities, emerging market debt, property and infrastructure through to insurance-linked assets and special opportunities such as healthcare royalties and aircraft leasing.
Brooks and Foster tend to avoid commodities as an asset class thanks to their volatility and lack of income.
Murray International (MYI) £11.86 BUY
This trust has been managed by Bruce Stout with a worldwide remit since 2004. Stout is supported in his decision making by 10 global equity specialists and invests for the long-term with limited turnover in the fund.
The top 20 equity holdings account for more than half the portfolio. Also investing in bonds, it aims to beat the income available from the market and offers a dividend yield of around 4%.
The manager tends to take a cautious approach. Top holdings include microchip manufacturer Taiwan Semiconductor Manufacturing; Groupo Asur, the Mexican airports operator; and it recently added Poland’s Bank Pekao to the portfolio.
AND A BONUS STOCK IDEA
Watkin Jones (WJG:AIM) 207p BUY
This student accommodation provider looks an attractive proposition on a long-term view. The shares currently trade on an undemanding price-to-earnings ratio of 13.4-times and yield
an attractive 3.7%.
As an asset class student accommodation typically has quite limited volatility and does not react in the same way as commercial property to the economic cycle.
Watkin Jones also has interests in the build-to-rent sector which is increasingly looking attractive as so many people can’t afford to buy their own home.
It recently struck a deal with M&G and Lochailort to deliver a build-to-rent scheme in Reading.
Unite’s (UTG) property director Richard Simpson will become chief executive of Watkin Jones in January 2019 and is a well-known and highly rated individual in the property sector.