SIPPs and CFDs

What is a SIPP?

by Atif Latif

A SIPP is a self-invested pension plan held in your own name which lets you decide when and where to invest the funds, even when you are still in full time employment. You also have control over what happens to the funds once you pass away. One of the key advantages of a SIPP is that you have this level of control, and as such you can choose from a very wide range of investment products in which to invest, from low risk interest bearing bonds to higher risk investments and even using your funds to leverage your investments via CFDs. You can diversify your investments by using your SIPP to invest in wine, property, and even antiques.

Unlike a more traditional pension contract where you are restricted from buying/selling certain assets in your plan, a SIPP allows you the freedom to buy/sell assets at any time, and transfer them back into another SIPP or pension scheme such as an employer’s scheme. The only constraint is that there is a restriction on how much you can invest each year in to your SIPP, and this currently stands at £215,000.

In order to be eligible for a SIPP you need to be under the age of 75 and a UK resident for tax purposes, a SIPP is also portable meaning you are able to move or split your plan between providers, allowing you to maximise and vary the range of investments available to you. Withdrawal of funds also offers greater flexibility as you do not have to wait until retirement age to withdraw funds from your SIPP, currently you are able to start drawing down funds from the age of 55 with the option of taking a tax free lump sum of up to 25% of the plan value.

What is a CFD SIPP?

A CFD SIPP account allows you to use funds from your SIPP to trade various investment instruments using the leverage advantages of a CFD. Most CFD accounts will give you access to trade single stocks, indices, forex, commodities, ETFs, futures and options. A CFD allows the investor to leverage purchases by using a small deposit to give them a larger exposure to an investment. For example, to buy £10,000 worth of Vodafone shares the initial deposit (margin) will be £500. Although the deposit is only 5% of the value of the investment, the exposure to this position is still the full £10,000 therefore your risk is not £500 but instead the full value of the trade. Another cost advantage to stock investments with a CFD is that there are currently no stamp duty charges for buying a CFD position in UK listed companies.

Clearly markets do not move in one direction and CFDs will allow you trade short which gives the investor the advantage of making potential profits in a falling market. Many investors have found this aspect an effective tool when looking to hedge out other investments within their SIPP portfolio.

As with a standard CFD account a CFD SIPP has the same order features such as stops and limits allowing investors to protect their risks and some platforms have the advantage DMA trading allowing investors to trade directly into the market.

What are the risks?

As with all leveraged products there are inherent risks that every investor should be made aware of before considering such a product. The obvious is that your losses can exceed your initial investment through using leverage, as the losses can be magnified in exactly the same was as your profits.

It is also worth noting that you, as the underlying client, could be liable for any losses over and above your initial investment, not the SIPP provider. Also of particular importance is the £215,000 limit that you are allowed to invest each year into your SIPP, this means careful risk management is required to ensure that your account is not over exposed.

As with a traditional SIPP you are unable to withdraw your funds until you reach an age of at least age 55, and this is subject to changes in tax and pensions legislation.

Summary

Whether you are looking to trade short term and have access to leverage, to take advantage of negative market moves by bear trading, or simply looking to hedge your portfolio to protect you existing long positions, this product could be of use to you.

If your account is managed carefully, the range of products and the flexibility in the strategies available, plus the benefits of reduced dealing costs and speed of execution through DMA, could greatly benefit your pension pot.