How To Diversify Your SIPP | Quick Guide

Diversifying your SIPP means investing in a variety of assets, such as stocks, bonds, and property, to spread the risk of potential losses.

It’s important because a well-diversified portfolio can help protect your retirement savings from market fluctuations and reduce the impact of poor-performing investments.

By combining different investments, you can achieve more stable returns, increasing the likelihood of reaching your long-term financial goals.

What is SIPP diversification?

SIPP diversification means spreading your investments across different asset classes, sectors, geographical regions, and more.

The goal is to minimise risk by not having all your eggs in one basket.

By diversifying your SIPP portfolio, you can reduce your exposure to any one investment and spread your risk across a variety of assets.

This means that if one company, fund, or asset you invest in performs badly, it will only have a small effect on the overall value of your SIPP.

Diversification is a fundamental principle of investing, and it applies equally to SIPPs as to any other investment.

How do you diversify a SIPP?

Diversifying your SIPP portfolio can involve different strategies, but it generally means spreading your investments across lots of different investments.

Here are some tips to help you get started:

Invest in different asset classes

Invest in a mix of assets such as managed funds, index tracker funds, equities, bonds, cash, and ready-made portfolios, This will help you spread your risk across different investments.

Asset allocation is a key factor in the success of your SIPP investment strategy.

A good starting point is to allocate your investments across different asset classes in line with your risk profile. Weigh up the percentage allocated to each asset class and see how it reflects your overall attitude to risk.

Invest in different sectors:

Invest in a range of sectors, such as healthcare, technology, finance, energy, retail, and more. This reduces your exposure to any one sector – for example, if the technology sector crashes for some reason, only a portion of your entire SIPP would be affected.

Different sectors perform differently at different times, and investing in a range of sectors can help smooth out returns over time.

Invest in different continents and countries

Invest in different countries and regions to spread your risk across different markets. This will help you avoid having too much exposure to any one economy.

Geographic diversification is essential to reduce the risk of concentration in any one market. It provides exposure to different markets and economies and reduces the risk of being affected by regional or local events.

Even if you’re more familiar with the UK investment market, try to invest elsewhere as well. If you’re less confident in overseas investments, you can invest in a managed fund that’s run by a professional fund manager, or invest in a ready-made portfolio. Or, seek financial advice.

Consider different investment styles

Consider investing in different styles, such as dividend income or growth investing.

Companies and funds that pay high dividends can have different risk factors compared to companies and investments targeting growth and expansion. The income you get from investments within your SIPP is tax-free and can be reinvested automatically to build your pension fund over time.

Here’s a table that highlights various SIPP investment options and their primary benefits and drawbacks:

Investment Type	What is it?	Benefits	Drawbacks
Stocks	Ownership in a company	Chance for high returns, growth	Risk of losing money, market ups and downs
Index Funds	Collection of many stocks	Spread risk, low cost	Tied to overall market performance
Bonds	Loans to governments or companies	Provide regular income, less risky than stocks	Returns may not keep up with inflation
Property Funds	Investments in real estate	Spread risk, earn income, protect against inflation	Tied to property market, not always easily sold
Cash Savings	Bank accounts, short-term investments	Safe place to store money, easy access	Low returns, may lose value to inflation
Commodities	Physical goods like gold or oil	Protect against inflation, spread risk	Can be volatile, market uncertainty

What’s the difference between high and low-risk investments?

Investments can be categorised into high-risk and low-risk investments based on the level of risk involved.

High-risk investments are more volatile, meaning they fluctuate up and down in value more intensely. So, they have a greater potential for returns, but they also have a higher risk of losing money.

Low-risk investments, on the other hand, have a lower potential for returns but are less risky. They tend to have a steadier price over the long term and fluctuate less dramatically up and down – it doesn’t mean they can’t lose value, though.

Examples of high and low-risk investments

High-risk investments

Small-cap and emerging market shares typically listed on smaller stock exchanges like the AIM 100.

Generallly with a SIPP, investing in individual stocks and shares is considered high-risk, even if they are big, FTSE 100 companies.

If you’re going to invest in single shares, make sure to spread your risk across many holdings and combine this with other assets like funds and investment trusts.

Small and emerging market shares have a higher potential for growth than large-cap stocks, but they are also more volatile and carry a higher risk of losing money.

Some managed funds are also higher risk than others. If you’re considering investing in a fund, look at the fund fact sheet (usually downloadable as a PDF from your SIPP platform). There is usually a risk level attached to each fund giving you an indication of how volatile the fund value is.

Low-risk investments

Government bonds, cash, and lower-risk funds and investment trusts are typically low-risk investments.

Government bonds are considered low-risk investments because they are backed by the full faith and credit of the government.

Cash literally cannot go down in price – however, it can go down in value if inflation rates are higher than interest rates. This means your cash is worth less over time despite it earning interest. For example, £50,000 cash went a lot further 50 years ago than it does today.

Fixed-income securities and annuities are also considered low-risk investments because they offer a fixed rate of return.

What is the ideal retirement portfolio mix?

The ideal retirement portfolio mix depends on your investment goals, risk tolerance, and time horizon.

There’s no one strategy that’s best or that fits everyone. However, generally speaking, your pension should be lower risk than other investments as it’s ring-fenced for your retirement – a time that you may have no other income sources other than the state pension.

A popular option is to gradually reduce the risk of your SIPP portfolio as you get older. When you’re young, your investments have more time to produce steady returns over long periods of time, and you’re less vulnerable to short-term market dips.

But as you get older, a downward swing could wipe out a chunk of your retirement savings and you might not have time for them to recover – it could be too close to your retirement date. This is commonly called ‘lifestyling‘, and it involves frequent reviews of your portfolio and your risk tolerance. A financial advisor can help you with this if you’re unsure.

How do I calculate my risk level?

Your risk level is determined by your investment goals, risk tolerance, age, and other factors. You can use an online risk tolerance calculator or consult a financial advisor to help you determine your risk level.

A risk questionnaire is designed to evaluate your risk by measuring how comfortable you are with taking risks in different aspects of your finances.

For example, if you prefer a contracted salary over bonus commission it indicates a lower risk profile. And if you feel anxious about the idea of your savings losing value, this could also indicate a lower risk tolerance.

How much do I need in a SIPP to retire?

The amount you need in a SIPP to retire depends on your retirement goals and lifestyle.

What age do you want to retire at? What kind of lifestyle do you want in retirement? How much are you spending now and will this reduce when you retire?

A general rule of thumb is to save 10 – 15% of your salary each year. but you might need to save more if you’re playing catch up.

It’s important to take into account your specific financial situation, including any existing pensions or savings.

As a general rule of thumb, some people choose to take 4% of their pension each year when they retire, and this would provide them with income at that level for 25 years (providing your investments don’t go down in value and not accounting for inflation).

Multiplying your desired retirement income (minus your state pension entitlement) by 25 can give you a rough idea of how much you need to save.

Should I have more than one SIPP?

It is not necessary to have more than one SIPP, but it can be beneficial to have multiple SIPPs if you want to diversify your investments further. Having multiple SIPPs allows you to invest in a wider range of assets, which can reduce your overall risk.

In general, you’ll probably find it easier to have all your investments in one SIPP, especially when you start drawing income and need to plan gradually selling your holdings and consider income tax.

Are SIPPs safe?

SIPPs are regulated by the Financial Conduct Authority (FCA) in the UK, and all providers must meet certain regulatory standards to operate.

However, how risky your SIPP is mainly depends on the investments you hold within it. If it’s 100% cash then it’s very low risk, but if it’s all invested in one company, it’s very high-risk. This is where diversification comes in.

As for SIPPs as a pension wrapper in general, they’re just as safe as any other.

What happens if my SIPP runs out?

If your SIPP runs out, you may need to rely on other sources of income, such as the state pension or personal savings.

Or, you may need to release equity from any property you own, downsize, or think about other financial options or lifestyle changes.

This is why it’s important to plan ahead and ensure you have enough income to support your retirement lifestyle.

What happens to my pension if my pension provider goes bust?

If your pension provider goes bust, your investments should not be affected.

SIPP providers are required to ring-fence investor money in separate accounts, and they don’t count toward the market value of the provider. This means if a SIPP provider goes into liquidation, they can’t use their customer’s SIPP funds to repay their creditors.

You are also protected by the FSCS scheme with a SIPP, which covers you for £85,000 in the event that there is significant fraud involved – but it’s unlikely you’d need to rely on this if your SIPP provider went into liquidation.

The greater risk with SIPPs is your underlying investments. If a share you invest in goes into liquidation and stops trading, you aren’t protected – this is the risk with investments. This is why it’s important to diversify and try to avoid single, high-risk investments in your pension.

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