Creating a passive investment SIPP portfolio

To create a passive investment portfolio you will need to choose low-cost funds that track an index, rather than one that requires constant management by you. This focus on diversified investments and cost-effectiveness to achieve steady returns can be a good option for long-term growth. We’ll break down how you can use passive investing in your pension here. 

Remember, the value of investments can fall as well as rise, and you may get back less than you’ve paid in.

Passive investment funds aim to match the performance of an index like the FTSE 100 or S&P 500, rather than beat it. They do this by investing in the same companies in the index – so a more successful company which has a bigger position in the index will be a larger part of your investment. 

There are two types of passive funds, and they trade slightly differently. Index funds are groups of investments that track an index and are traded once a day. Whereas, exchange-traded funds offer similar groups of investments, but they’re traded more like stocks and shares, so when the markets are open. You can explore the full range of investment funds we have here.  

Passive vs active funds

Fund managers actively manage active funds. They are responsible for monitoring the investments and for deciding – based on their research - whether to buy or sell a company, or to add to an existing position in a company. The aim will be to deliver higher returns than the index. The drawback of this is higher management fees. 

Passive funds generally have lower fees, and although they still have fund managers, they can be less responsive to changes in the market like crashes, as investments won’t be sold. Instead, you’ll have to ride out any drops in value. The lower fees you’ll pay mean you’ll keep more of any gains, which can help your investments grow more.  You’re relying more on the long-term growth of the overall market, which involves patience and consistent investing.

Here are the potential benefits of using passive investments in a self-invested personal pension (SIPP):

Cost

One of the biggest advantages of passive investing is lower costs. As passive funds usually operate with lower charges, over time you keep more of any gains, which can mean higher returns for your pension.

Less management

Passive investing can require less management from you as you won’t have to worry about buying and selling individual investments based on their performance. Instead, you’ll have dozens of different investments in your ETF or index fund.

Long-term growth potential

Markets have achieved positive returns over the long term, and investing in passive funds is one way that allows you to benefit from this. By staying invested in broad indices like the FTSE All-World or S&P 500, a passive SIPP portfolio can ride out ups and downs.

It’s worth noting however, there’s no guarantees that you will be better off investing in passive funds compared to others.

As you won’t be managing passive investments regularly, choosing the right ones for your SIPP is important if you’re going to get the growth you want. Here are some things to consider: 

1. Diversification – A well-balanced passive fund portfolio may include exposure to different asset classes like stocks and shares or bonds and regions (the UK and Europe, the US, emerging markets) to spread risk and enhance stability.
2. Low fees – We explain fees below, but basically the lower the better. 
3. Fund performance – You can’t predict how a fund is going to do in the future, but you can check how it’s performed in the past, to see if it has matched its benchmark index closely. Past performance is not a guide to future performance. 
4. Your goals – How you invest should be based on your feelings about risk and how long you’re planning to do it for. For example, equity (stocks and shares) funds offer higher growth potential but more risk, while bond index funds provide lower growth and lower risk levels. Mixing investments like these can help you tailor your SIPP to your goals.
5. Risk level – Different funds will have different risk ratings, and you need to make sure you’re comfortable with the level you’re at.

You can research passive funds by looking at different investment platforms to compare their range of funds and the fees they charge. When you’ve found funds in areas you’re interested in you can read the fund factsheet to get the details on the assets inside it, its charges and how it has performed in the past.

Costs and fees associated with passive funds

When you’re choosing passive funds, one of the best ways to compare them is to check the fees. As you’re not paying for an active fund manager service, you’ll want to keep any fees as low as possible. Here are the costs you should look out for: 

Fund manager charge (FMC) – this covers running the fund.

Platform fees – this is your SIPP provider’s annual fees. 

Trading costs - some platforms charge when you buy or sell, and the amount can depend on the type of investment.

Small differences in your fees may not seem important, but they can make a big difference over the years. A 0.5% annual fee on a £100,000 portfolio could mean thousands of pounds lost over 30 years, compared to a 0.1% fee. 

Before investing, it’s a good idea to take some independent financial advice. If you don’t already have one, you can find a financial advisor at Unbiased – there may be a charge for advice, but there are often a number of ways to pay.