Why consider investment companies for a SIPP?

Investment companies can offer advantages both while you are investing to build up capital in your SIPP – and also when you want to use it to provide a retirement income

Building a fund for retirement

Long-term performance

A pension is probably the longest financial investment you will ever make. You could be investing for 30 years or more. Investment companies can be more risky, particularly in the short term, but often outperform in the long term.

A wider choice of investments

Investment companies offer access to a much wider choice of investments due to their closed-ended structure. This includes investments which, though often more risky, can outperform in the long term, such as private equity.

The ability to gear

Investment companies can borrow money to make additional investments (‘gearing’). Gearing increases the risks, but can increase profits over the long term. Bear in mind that not all investment companies use gearing and most only use modest levels.

Generating income in retirement

Access to a wider range of investments

Investment companies can invest in a wide range of other investments that can generate a higher income. Assets like commercial property, infrastructure and renewable energy can all offer a higher level of income and, being illiquid, are better suited to being held in a closed-ended fund like an investment company.

The ability to smooth dividends

Unlike some other funds, investment companies can hold back some income in good times to pay it out in leaner ones. This means that investment companies can maintain or increase their dividends even at times when the companies they invest in are reducing theirs.

Paying dividends out of capital profits

Investment companies, unlike some other funds, don’t have to pay dividends just out of the income they receive from investments. They can also pay them out of the profits they make from buying and selling investments. This can be a useful tool to maintain or increase dividends in more difficult times.

The ability to gear

Just as investment companies can use gearing to magnify capital profits, they can also use it to boost income.

Investment companies can pay dividends out of their capital profits as well as their income – helping to maintain dividends even in difficult times