It’s never too late to contribute to a Self-Invested Personal Pension (SIPP). Even if you start contributing in your 50s or 60s, you could potentially build significant wealth for retirement.
However, for those starting to contribute to a SIPP in their early 40s, the results can be remarkable (due to the power of compounding). Here’s a look at how much £500 invested a month starting at the age of 40 could lead to by retirement age.
Multiple advantages
From a wealth-building perspective, SIPPs have several advantages. For starters, contributions come with tax relief. This is essentially a reward from the government for saving for retirement.
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For basic-rate taxpayers, the relief on offer is 20% (it’s higher for those earning more). This means for every £80 contributed, the government will add in another £20, taking the total contribution to £100.
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.
Secondly, investments can grow free of Capital Gains Tax (CGT) and Income Tax. So for example, generating a profit of £10,000 on a stock or fund, would see no CGT payable.
Third, SIPPs tend to offer access to a wide range of investments including funds, ETFs, stocks, and investment trusts. With these types of investments, it’s possible to generate returns of 8% a year or more over the long term.
Achieving high returns
It’s worth pointing out that high returns aren’t guaranteed. But to achieve attractive returns, it’s best to build a properly diversified portfolio. Investors also need to be patient and remain comfortable with short-term market fluctuations.
In terms of building a portfolio, there are many different approaches that can be taken. Personally, I’m a fan of combining funds (both active and passive) and individual stocks.
Funds can be a great foundation for a SIPP portfolio as they typically offer access to a wide range of stocks. This ensures the investor’s eggs aren’t all in one basket.
Individual stocks meanwhile, offer the potential for higher returns. Take Amazon (NASDAQ: AMZN), for example. Over the last decade, its share price has risen from around $19 to $195. That translates to a return of about 26% a year.
There are not many funds that have generated that kind of return for investors. Had an investor put $10,000 into Amazon stock a decade ago, that would now be worth more than $100,000.
I’ll point out that I believe Amazon stock is still worth considering as an investment today, despite its huge gains over the last decade. To my mind, the company has significant long-term potential given its exposure to cloud computing and artificial intelligence (AI).
That said, there are plenty of risks to consider, such as a drop in consumer and/or business spending. Concerns over these risks can lead to share price volatility at times.
£635k by 65?
Let’s say an investor was able to achieve a return of 8% a year over the long term with a mix of funds and individual stocks. If they started investing £500 a month at 40, and received tax relief of 20%, I calculate they’d have around £535,000 by the age of 65.
If they were able to achieve a return of 9% a year, they’d get to around £635,000 by 65. These figures show what’s possible by saving early and puts together a decent investment strategy.
