Investing within a Self Invested Personal Pension (SIPP) is one of the most effective ways to build retirement wealth. A regular savings plan paired with a sound investment strategy are key steps to build a large nest egg. However, by leveraging the tax advantages of this special investment account, the wealth-building process can be put on steroids.
So let’s break down how effective this strategy can be for a 50-year-old investor putting aside £750 each month.
Crunching the numbers
It’s important to remember that when it comes to investing, there are never any guarantees. However, a proper investment strategy can reasonably be expected to generate an annual return of around 8-10%. At least that’s what the overall stock market has historically provided.
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Assuming a 50-year-old investor is aiming to retire at 65, investing £750 each month at this rate would yield a portfolio worth between £259,528 and £310,853. That’s not bad. But watch what happens when we introduce the SIPPs most powerful feature – tax relief.
The amount of relief received depends on the income tax bracket. But let’s assume an investor is paying the Basic rate, resulting in a tax relief of 20%. That means for every £750 added to a SIPP, there’s actually £937.50 worth of capital to invest. When factoring that in, an investor’s nest egg could surpass the previous figures, reaching between £324,410 and £388,566.
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.
Building a winning strategy
As previously mentioned, the success of an investment portfolio largely depends on the success of the strategy. A badly constructed portfolio or even a well-built one that’s badly managed can yield returns that fail to reach the 8-10% target. In some cases, a portfolio might even generate losses resulting in the destruction of wealth rather than its creation.
Finding top-notch stocks to buy can be a challenging task. Even if a strong business is uncovered at a reasonable price, it may still be a poor investment, depending on an investor’s objectives and risk tolerance. Looking at my own SIPP, the strategy I’ve chosen is focused on dividend growth opportunities like Safestore Holdings (LSE:SAFE).
Self-storage enterprises are currently enduring adverse market conditions that make growth a challenge. That’s translated into pretty disappointing share price performance in recent years. But with such highly cash-generative operations, management’s busy expanding internationally and positioning itself to thrive for the eventual market recovery.
This isn’t the first time Safestore has navigated macroeconomic headwinds. And the last time, prudent capital allocation decisions resulted in a 15-year streak of dividend hikes and robust share price returns totalling 677%. That’s an annualised return of 14.6% – firmly ahead of the stock market average.
At this rate, a £750 monthly investment into a SIPP could transform into a massive £602,410 nest egg after tax relief! Of course, there’s no guarantee of a repeat performance spanning the next 15 years. And for investors seeking to capitalise on growth rather than income opportunities, Safestore could be a bad fit.
At the same time, the self-storage industry is far more competitive today, creating further challenges for management to overcome. Nevertheless, for dividend-searching SIPP investors, this is a business I think deserves a closer look.
