Self-Invested Personal Pensions (SIPPs) offer investors more flexibility and control. Unlike traditional pensions, they allow a wide range of investments, including small-cap stocks, investment trusts, and exchange-traded funds (ETFs).
Contributions receive tax relief — between 20% and 45%, depending on income — that can also be invested to boost long-term growth.
Over time, this can build a significant pot for retirement, even from modest sums of money.
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.
Regular investing
For instance, let’s say a basic-rate taxpayer invests £200 in a SIPP every month. This means they would get another £50 paid in a few weeks later in the form of pension tax relief. The total would therefore amount to £250 per month, or £3,000 per year.
Were they to achieve a 9% average annual return from their investments, this would grow to nearly £160,000 after 20 years.
Keep it going for another decade, the final pot would be £425,790. A significant sum for many people.
The benefits of diversification
Now, I should mention that these calculations don’t include any platform fees or dealing charges. And a 9% return isn’t assured, as stocks can lose value as well as rise. Dividends may also be cut.
The good news is that diversification can go some way to offsetting these risks. For example, owning a few dividend payers would cushion the blow if one cancels its payout, while a basket of growth shares can often make up for one or two that flatter to deceive.
Stock example
To give a real-world example, my own SIPP currently has 21 stocks, as well as a small handful of investment trusts. This means it has a pretty good level of diversification.
That’s a good job because one stock has certainly disappointed recently — Novo Nordisk (NYSE: NVO). Shares of the Danish pharmaceutical giant have cratered 59% in just 10 months in my SIPP!
Novo is a global leader in diabetes care, controlling around 33% of the market. And through its injectable Ozempic and Wegovy treatments, it also currently has the lion’s share of the fast-growing GLP-1 weight-loss market too.
In Q4, sales of obesity drug Wegovy surged 107% year on year, helping drive net profit 29% higher to almost $4bn. Very strong stuff.
However, arch-rival Eli Lilly recently reported robust Phase 3 results for its oral GLP-1 candidate orforglipron (admittedly a bit of a mouthful!). Lilly says this daily pill will be easier to manufacture, and unlock access for millions of patients who are scared of needles.
It could also erode Novo’s dominant position in the lucrative GLP-1 market. This explains why the stock has shed so much weight and is now trading on a forward price-to-earnings ratio of just 14 — a very low multiple.
At that valuation though, I think the stock is worth considering. This is particularly true given the global anti-obesity drugs market is expected to top $100bn by 2035.
Unfortunately for me though, I’ve backed the wrong weight-loss horse so far.
Still worth it
Despite the risks of manging a DIY pension, I think it’s worth the effort.
For someone starting in their early 20s, the example SIPP above would be worth a whopping £1.64m by the time they retired at 68, assuming the same 9% return and £200 monthly investment.
When combined with a workplace pension, that would certainly make retirement much more comfortable.
