CFD SIPPS – A Summary

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Andrew Collins

06 May, 2005

in Spread Betting / CFDs and 1 more

The CFD market has expanded rapidly over the last few years and a number of innovative new products have resulted from the strong following that CFDs now have. One of those developments is CFD SIPPs. For those of you not familiar with SIPPs, they are Self Invested Personal Pension Plans which basically represent your pension fund, but instead of handing the management of those funds over to a pension fund company, you are able to manage it yourself. The range of investments available to you is very broad, including commercial property and of course stocks and shares. Recently the legislation has changed and you can now use CFDs as a means of trading equities within your SIPP. Now before I go any further, I hasten to add that I am not a pension adviser and you should always seek professional advice, especially before considering the use of a derivative instrument as part of your pension strategy.

The benefits of using CFDs in a SIPP are significant in that you have the ability to gear up positions, not only for speculation and trading, but also as a means of hedging existing positions in your current SIPP portfolio. Having the ability to go short as well as long can and does make a real difference to trading performance. Your immediate reaction to using CFDs in a SIPP perhaps is that it seems crazy to gamble your pension using a derivative instrument that gives you significant gearing potential. The answer is simply that CFDs can be used to enhance your gains and should always be used in the context of a strict risk control policy. You have the option to split your SIPP fund so that part is in a CFD SIPP and part is in a traditional portfolio. That way you can have the best of both worlds, a traditional portfolio of stocks and shares as well as a CFD account that allows you to enhance your returns when you feel it is appropriate to do so, whether that be magnifying your exposure to a particular stock or index, or using a short position to either hedge an existing position or speculate on a stock being over valued.

So how do you go about getting a CFD SIPP account? Well firstly you should always consult your pension adviser to ensure that it is an appropriate course of action for your circumstances. If this is okay you then have to choose a pension administrator, and whilst there are several to choose from, most of the CFD providers prefer to use a company called SIPP Deal which is one of the largest SIPP administrators in the country and they use the Bank of Scotland for all client funds. There are other providers which your pension adviser will be able to help you with. Once you have settled on which administrator to use it is then a case of finding the CFD company that you will be using to effect your transactions. There are several major CFD companies which now provide the option to trade CFD SIPPs. They all have their merits, but differ in certain aspects such as the level of gearing available and the universe of stocks available to you for investment. In the main you can invest in the large stocks of the major UK indices and some also give you scope to invest in the US. There are a number of small differences between the major providers which I will not go into for the purposes of this article.

So in summary what are the benefits of a CFD SIPP?

  1. Using a CFD you pay no stamp duty, immediately saving you 0.5% per transaction
  2. The ability to hedge existing market positions in your traditional portfolio or short stocks which you feel are over valued.
  3. The ability to use leverage both in short and long transactions.
  4. Low commission costs of around 0.2% which compares very favourably to traditional stock brokers that normally charge between 1% and 2% on both sides of the transaction. On a £10,000 trade this can save you several hundred pounds just in commission costs.
  5. You can have access to the Level 2 system giving you the ability to trade on the order book. A traditional stockbroker will always quote you the market spread which is far more costly. Yet another significant saving which if you are dealing in size could run into thousands during the course of a year.
  6. Flexibility: SIPPs provide full transparency in that you know exactly what you are invested in at any one time. There are not many pension fund companies that will be able to give you a detailed breakdown of how your funds are invested at any one time.

Using CFDS in a SIPP correctly and with a sound risk monitoring framework can help you to achieve better returns form your SIPP over time which you would otherwise not be able to do in its traditional form.

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[QUOTE=bsheena;176930]CFDs certainly have their benefits, but this guy sounds too keen to plug them with several half-truths e.g.

"Low commission costs of around 0.2% which compares very favourably to traditional stock brokers that normally charge between 1% and 2% on both sides of the transaction. On a £10,000 trade this can save you several hundred pounds just in commission costs"

Additionally AIUI the CFD fee is on the leveraged amount, so if you pay 100 for the CFD on a typical 10-1 leveraged UK stock, the trade is considered to be 1,000 and your commission is on the 1,000 (each side of the trade) . They also charge interest for the leveraged amount, typically a couple % above libor. Holding a CFD for several months could be very pricey. If you work out how much you pay in interest and commission on any trade, and remember that you pay that win or lose on the trade, the % of your profits given over to commissions and interest can be very high.

if you are going to trade CFDs you need to anlayse in detail the probable costs against your expectations of trade profits, because you can take a significant hit.

It can be a good way to enhance profits or hedge risk but take much care to analyse costs and risks properly.

Jul 03, 2008

Member (35 posts)

good

May 14, 2005

Member (29 posts)

CFDs certainly have their benefits, but this guy sounds too keen to plug them with several half-truths e.g.

"Low commission costs of around 0.2% which compares very favourably to traditional stock brokers that normally charge between 1% and 2% on both sides of the transaction. On a £10,000 trade this can save you several hundred pounds just in commission costs"

Not true, most of the major brokers charge a flat rate of around £12

"You can have access to the Level 2 system giving you the ability to trade on the order book. A traditional stockbroker will always quote you the market spread which is far more costly."

Not necessarily - if you want to get filled on the current bid/offer (except for large quantities) on all SETS names you will get the same price on Level 1 and Level 2 obviously

"Flexibility: SIPPs provide full transparency in that you know exactly what you are invested in at any one time. There are not many pension fund companies that will be able to give you a detailed breakdown of how your funds are invested at any one time."

My pensions at both of the companies I've worked for have allowed me to choose where exactly I want to allocate my funds - I can't believe this is the exception.

May 11, 2005

Newbie (1 post)

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