Working the options in SIPPs

Self invested personal pensions, or SIPPs, allow the investor to use a number of financial products which can be used to enhance your portfolio.

The instruments available vary with each SIPP provider, but on the whole investors have access to derivatives such as Contracts for Difference (CFDs), futures and options, structured products and covered warrants.

“Using something like a CFD will give you tax benefits and can be a good way to hedge exposure you already have in your portfolio,” says Angus Campbell, head of UK sales at City Index.

“It’s an alternative, tax efficient way of accessing the underlying and you don’t need to put up the full capital of the notional exposure to the position.”

The downside of CFDs is that risk is unlimited if the trade goes against you.

At stockbroker Pilings in Manchester covered warrants are the only derivatives allowed in SIPPs. “Covered warrants give us access to a number of option strategies,” comments broker Alistair Hodgson.

“At the moment I’m looking at a put on the FTSE 250 because if any part of the market is expensive its there, so I’ll take that as a cover to the stocks I have.”

Covered warrants are instruments which give access to a stock, basket of stocks, index and even some commodities, without the investor buying the underlying. They are similar to CFDs, but are listed and traded on the London Stock Exchange. A warrant to either buy or sell the underlying can be purchased – hence their use in shorting.

While covered warrants are the only derivatives allowed in the Pilings SIPP, brokers there do manage investors’ money which is in other companies’ SIPP wrappers. City Index also provides a discretionary or advisory service for investors interested in using CFDs.

An investor wishing to use instruments in his SIPP with advice from a broker of any sort would need to check two things with the provider: firstly that they would allow the use of the instruments of interest, and secondly whether they recognised the broker.

Of course the DIY route is also an option. Investors wishing to use derivatives must sign a risk warning, and be considered ‘sophisticated’.

At SIPP provider James Hay, propositions and e-commerce manager Chris Smeaton reckons using derivatives is popular with investors.

“The type of people who take out Sipps are the type of people who understand the benefits of different sorts of investing,” he says.

“Investors and their advisers want to have derivatives because the upside is so large in a portfolio of, say £1m, that is is worth the risk of having a part of the portfolio invested in this way.”

1 July