What’s the right balance of growth and income shares for a SIPP?

Story by Christopher Ruane

Key takeaways

  • Investment Strategy: Consider a mix of growth and income shares based on your retirement timeline, objectives, and risk tolerance. Growth shares can benefit from long-term business development, while income shares provide steady dividends.
  • Income Quality: Focus on the source and sustainability of dividends. High yields today may not last if the underlying business is weak. Look for companies with proven cash flow and growth prospects.
  • Personal Goals: Define whether your SIPP aims for capital gains or regular income, and adjust your portfolio accordingly. Understanding your financial needs in retirement is key to choosing the right balance.

Pensions, for many of us, seem a long way off until they don’t. So a lot of investors pay too little attention to their Self-Invested Personal Pension (SIPP) for a long time before later scrambling to try and bulk it up as retirement draws closer.

This can raise the question of how to strike the right balance between growth and income shares for a SIPP.

This can raise the question of how to strike the right balance between growth and income shares for a SIPP.

Why growth can make sense in a SIPP
Each investor is different, of course, so there is no one correct answer. Some investors may even feel there is no need to balance, for example plumping for putting their whole SIPP into income shares in the hope of steady passive income streams.

This is understandable. Retirement costs money and pensions may be the only source of income at that point.

But I think the long-term nature of investing for retirement in a SIPP can provide the sort of timeline in which some growth shares are able to shine, as their businesses prove themselves and then develop.

Understand your objectives and risk tolerance
Part of this process will also depend on what someone is looking for from their SIPP, in terms of investment objectives.

Some people will hope dividends from the SIPP can form a significant part of their income in retirement. Others will be looking for the prospect of capital gain and may place a lower value on dividends.

Getting clear about your objectives and your risk tolerance (how much risk is willing to be taken in search of the targeted level of reward) is always an important part of any investing. This is true when it comes to deciding how to invest the money in a SIPP too.
Thinking about income and the source of income
One of the things I think is important when it comes to any income shares is trying to dig into the source of income. Where is it coming from? How likely is it to last?

Some investment trusts or companies may offer a high yield today, but in a way that seems ultimately unlikely to be sustainable over the long term. Maybe the business is in decline, or the trust’s spare cash is being eaten up.