A big enough SIPP can help someone live their retirement years in style – and potentially retire early into the bargain.
But how can an investor boost the value of a SIPP?
Here are three ways.
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1. Putting more money in, now
Retirement can seem far off for many people, but it creeps up fast.
The earlier someone puts money into their SIPP, the longer the timeframe on which they can make it work for them. As a believer in long-term investing, I think that can be a simple but powerful way to grow the value of a SIPP in future.
More money invested now will hopefully mean bigger rewards in future.
2. Paying close attention to charges, fees, and commissions
Sometimes SIPP providers have what seem like a very attractive cost structure – but that can change over time.
If an investor is too busy, working and living life, they may not notice that fees and other costs are adding up.
While it may seem like a small number, 1% or 2% per year over the course of decades can eat into the value of a SIPP dramatically by the time it comes to drawing it down for retirement!
So I think it always makes sense for an investor to consider their choice of SIPP provider (and the specific SIPP structure) carefully and review that choice from time to time. After all, it is possible to transfer a SIPP just like it is possible to transfer an ISA.
3. Buying the right shares
The two moves above are measurable and fairly obvious.
My third one, by contrast, involves some judgement. It is easy to say that a SIPP investor ought to buy the right shares – but what does that really mean in practice?
One thing I think some investors get wrong when it comes to pensions is paying too much attention to what is going on now and not enough to what may happen between now and when they draw their pension, potentially many decades from now.
So, for example, the 7.1% yield offered by Diversified Energy (LSE: DEC) certainly grabs my attention. If I could earn that sort of yield then compound it in my SIPP for two or three decades, I could potentially increase my pension’s value significantly. (£10,000 compounded at 7.1% annually for 30 years would grow to £78,286).
But the question is, could I earn that sort of yield for decades?
Diversified has come up with an innovative approach to the gas business, buying up tens of thousands of old wells that still have some resources left in them. It has a vast estate of gas wells.
But such an approach also brings risks.
One is servicing the substantial debt pile the company has incurred along the way. Another is the potential costs for cleaning up those old wells once they reach the end of their productive lives.
The Diversified yield still looks juicy, but the dividend has already been cut in the past several years and the long-term share price chart does not fill me with optimism, either.
That helps explain why I do not own Diversified shares in my SIPP and have no plans to buy them. Potential rewards matter – but so too do risks.
