Investors bet with their pensions
By Emma Simon
Published 16/08/04
This article appeared in The Sunday Telegraph.
Sophisticated investors are using their pension funds to place
highly geared bets on stockmarket movements.
Betting on share price movements through derivatives known as
"contracts for difference" (CFDs) has become increasingly
common as the prices of conventional shares continue to tread
water.
Financial advisers and pension providers report that more and
more people are using their pension fund money to trade in CFDs
because the returns are more tax-efficient.
The Inland Revenue has confirmed that anyone holding a self-invested
personal pension (Sipp) can invest in CFDs, provided they are
linked to shares traded on a recognised stock exchange. However,
losses must not exceed the portion of the fund allocated to CFDs.
CFDs allow investors to place bets on the movement of stockmarket
indices or movements of individual share prices. Investors can
buy a CFD at a fraction of the underlying share price. This helps
magnify gains if the investor correctly predicts the direction
of the share price, but can also generate losses of much more
than the initial stake.
Michael Fairweather of I-Sipp, a firm specialising in advising
Sipp investors, says investing in CFDs through a pension ensures
there is no capital gains tax to pay on any profit. In addition,
investors receive tax relief on contributions paid into the pension
fund.
Not all Sipp providers will allow customers to trade in CFDs,
but Poynton York, James Hay and AJ Bell are among those that do.
Andy Bell, the managing director of AJ Bell, said that the firm
was seeing rising demand for this type of investment. He said:
"Provided the Sipp is set up correctly, there's no reason
why people can't invest in CFDs. But it's important to keep losses
below the value of the CFD account in the Sipp. This would mean
breaching Inland Revenue rules, and could jeopardise the entire
Sipp."
Investors can avert this danger by buying "stop-losses",
which close the CFD once losses have reached a pre-set level.
