The ravaging effect that inflation imposes on the growth of your SIPP fund and the value of your income in retirement can be catastrophic
Where To Invest To Combat The Penal Effect Of Inflation?
For the past few years, the rate of inflation has been higher than the rate of interest earned on most deposit accounts.
Thanks to the Bank of England keeping its interest rate at a record low for the longest period in history, and its Governor pledged to keep it that way until the economy is well into recovery, where to invest the money in your SIPP an important question.
Investment Returns Under Various Inflation Conditions
Inflation can be low or high. And the inflation trend can fall or rise. Combining these criteria gives us four different inflation types.
An interesting data analysis was carried out by JP Morgan Asset Management over a 40 year period from 1972 to 2012. It looked at the main areas where you could invest your money. The research considered each of the four inflation types. The table below summarises its findings. Whilst the figures are from the US, similar results would apply in the UK.
The grey column shows the average rate of inflation for each of the four inflation types. We’re currently in a period of low and rising inflation, and expected to remain so for some time, so the results for this type are shown first.
The investment areas are shown in risk order, with the lowest risk area to the left and the highest to the right. Only squares shown in green have produced a real return above the rate of inflation, though SIPP charges and adviser fees have not been taken into account. The figures in the table are percentages.
Cash Accounts Are Not An Option
If you look back into history, the traditional method of defeating inflation was to put your money into high interest bearing savings accounts. Today, however, they simply don’t exist.
For some time, there have been almost no deposit accounts that would give you a return over and above the rate of inflation. If you calculate the real buying power of your money, as each month passes, your money will buy you less and less.
If you hold cash in your SIPP, you have two added problems that can seriously erode the true value of your money:
- 1. As a result of the charges you pay your SIPP operator, chances are you’re effectively paying a fee to administer your cash, and that means you need to earn MORE than the rate of inflation just to stand still.
- 2. The choice of deposit accounts for SIPPs is often much less than those available for cash, reflected in much lower interest rates, making it virtually impossible to earn what you need to keep pace.
When you take into account SIPP operator fees and adviser fees, it's likely to be the case that in all four inflation types, you'll always struggle to gain a real return for the money your SIPP if you invest in deposit accounts.
Inflation Will Strangle Your Deposit Accounts
The evidence is clear. Unless you need ready cash in your SIPP to pay fees, to meet loan repayments, to draw out your tax free cash or retirement income, or imminently make a large investment like a property purchase, you should move your money out of deposit accounts as quickly as possible.
Time and again, people tell me they’re worried they may lose capital if they choose other investments. You know, they’re completely right. Stockmarkets rise and fall. Property values fluctuate. It’s a fact that outside cash deposits, you have to be prepared to accept some volatility.
But one thing is certain.
Over time, basic economics suggests that areas other than cash will deliver returns to beat inflation and cover SIPP charges. This conclusion is backed up by the figures in the above table. And in plenty of other research too.
Spreading Investments Is A Good Thing
Guess what. We already know that. But it’s nice to see it confirmed by research.
Where you diversify is all down to the level of risk you’re prepared to accept for your money.
Maybe you want to put a toe in the water and lend your money in the form of ‘high yield bonds’ such as the loan notes and corporate bonds you’ll find in the SIPPclub Invest area.
Or perhaps you’d prefer to invest your SIPP funds into commercial property. This could include the premises in which your business trades, so you effectively pay rent to your SIPP and not to some external landlord. In the UK, we love property. When you see in the table above that property has always performed well whatever the inflation condition, it should come as no surprise to you that property investment and property backing is hugely supported by SIPPclub.
And of course, you have the whole range of stockmarket investments, stretching through to the riskiest but often the most profitable end that is commodity trading.
One thing is important. It’s wrong to let inflation have the upper hand because you’re worried about making a mistake and losing capital. Worry often stems from lack of knowledge. But thanks to the internet, there’s so much information available, you're only kidding yourself if you use worry as an excuse for leaving your money on deposit. If the internet confuses you with 'information overload', an experienced independent SIPP adviser can be a great ally.
“Never Put Off Until Tomorrow What You Can Do Today”
So said Thomas Jefferson. And when it comes to the penal effects of inflation, a truer word could not have been spoken.
The day to do something about this is today. For if you do it tomorrow, one thing is guaranteed. Inflation will mean you’ll have less money to play with in real terms!
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AJ Bell Is Often The Best Value SIPP For Stockmarket Assets
Over time, charges can wipe out a huge part of your fund. We like AJ Bell because there are no set-up costs. If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund. And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment). However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.
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As SIPPclub neither advises on, nor arranges, nor recommends specific investments or strategies, we're unable to say whether a SIPP or SSAS or any investment within it is right for you. Ultimately, it’s your money and your decision, and you should only proceed once you're satisfied you've undertaken sufficient due diligence. If you need advice, you should speak to your trusted adviser, or you could find a local adviser from Unbiased.co.uk. Alternatively, we'd be pleased to introduce to a suitably qualified independent financial adviser.
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