A Self-Invested Personal Pension (SIPP) is exactly what it sounds like. Retirement (and therefore pensions) can seem like a distant concern for many people. But it gets closer every day.
Indeed, with the right approach, I think I could bring it even closer and retire early by using a SIPP to boost my income streams.
Earning passive income
Imagine I had £8,900 to invest. Maybe I could put it to work in a portfolio of companies that see the phenomenal sort of share price growth once seen at businesses like Amazon and Tesla. That is possible.
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Most investors though, would be doing well to have one such incredible growth share among their SIPP holdings, let alone a few.
Still, imagine a more modest performance. For example, imagine that I could compound the value of my SIPP by 12% annually, whether through share price growth, dividends, or a combination of both.
That would give me a SIPP worth almost £86,000 after 20 years, over £151,000 after 25 years – and over a quarter of a million pounds after three decades.
I could use that to generate passive income in the form of dividends, allowing me to retire early.
Getting the right shares at the right price
In theory, that sounds all well and good. In practice though, achieving a 12% compounded annual return over the course of decades is far from easy.
There may be good years, but there could be very bad ones (or even bad decades).
On top of that, a lot of investors underestimate the impact risky shares can have on their portfolio over the long term. Some brilliant performers can be effectively cancelled out when it comes to their impact on total return if there are enough duds in the portfolio.
So I would take time and make effort to find brilliant shares at attractive prices that I could buy for my SIPP.
Looking for quality on sale
As an example, consider a share I would be happy to buy for my SIPP at the right price: Cranswick (LSE: CWK).
The food producer might not be a household name, although its products are sold in shops across the country. Over the past five years, its share price has moved up by 57%. On top of that, the company has raised its dividend annually for decades. The shares currently yield around 2%.
Food production is a competitive business and profit margins can be slim. So risks like ingredient and wage inflation pose a risk to profitability at the FTSE 250 sandwich maker.
But Cranswick highlights that strong returns can be found not only in racy, fast-growing business sectors but also in workaday businesses that over the course of time have honed their commercial model.
Putting all our eggs in one basket is the sort of risk I was talking about above, so when investing my SIPP I always aim to keep it diversified.
By following simple principles of smart investment like that, while hunting for great businesses at good prices, I think even a fairly modest SIPP today could potentially help me retire early in future.
