How I’d target a £3.7m SIPP with just £350 a month

By regularly investing money in a Self-Invested Personal Pension (SIPP), building a million-pound pension portfolio’s pretty straightforward.

While it can take some time for compounding to work its magic, putting aside just £350 each month is all it takes when investors start early. And even when starting later in life, it’s still possible for an individual to significantly improve their retirement lifestyle.

Targeting a million

SIPP investing’s a bit different from a regular brokerage account. For one, it comes with a few restrictions, the most obvious being that it’s not possible to withdraw any funds until after reaching 55 years old. And this threshold may change in the future.

However, while restrictive, a SIPP also comes with two powerful tax advantages. Firstly, capital gains and dividend taxes are out of the picture just like with a Stocks and Shares ISA. However, unlike an ISA, a SIPP also provides tax relief.

Therefore, an investor in the 20% income tax bracket depositing £350 a month, actually ends up with £437.50 of capital to invest with.

The easiest way to turn this into a seven-figure portfolio is with a low-cost index fund. Looking at the FTSE 250, the UK’s flagship growth index has historically generated an average annualised return of around 10% since its inception. Assuming this performance continues, investing £437.50 each month would build a £1m portfolio in roughly 30 years.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Beating the market

Three decades is a bit of a long wait. Yet investors may be forced to wait even longer if the FTSE 250 doesn’t keep up with its historical success. And given that already seems to have been the case over the last decade, relying on index funds may be unsuitable.

Stock-picking provides a potential solution to this problem. Instead of buying an enormous basket of companies, investors can custom-craft a portfolio of individual businesses, filtering out the weak ones to only own the very best.

This investment strategy requires more effort and discipline. It also usually comes with higher volatility and risk. But it also opens the door to market-beating returns that can significantly shorten the journey to £1m.

Take a look at Greggs (LSE:GRG) as an example. The British bakery chain may not sound like a lucrative opportunity. But as it turns out, Britons love its sausage rolls. In more recent years, the firm’s pizza offer has also been proving highly popular, driving up sales, earnings, and cash flows to all-time highs.

Since going public in 1993, the UK stock has delivered a total return of almost 9,600%, or 15.9%, on an annualised basis. And at this rate of return, building a £1m portfolio with £437.50 each month would ‘only’ take 22 years. And for those willing to wait the full 30, there could be just over £3.7m sitting in their SIPP.

Greggs has been a phenomenal outperformer. However, whether it can maintain its historical momentum’s unclear. Management’s current growth strategy involves expanding its network of locations across the UK. Yet this may result in self-cannibalisation if the group’s already begun saturating its core market.

In other words, there’s no guarantee it can maintain double-digit gains between now and 2054. Nevertheless, by building a diversified SIPP of Greggs-like companies, investors can potentially drastically improve their long-term financial prospects.