A Self-Invested Personal Pension (SIPP) is a very handy investment vehicle for people like me. I can pay up to £40k into the SIPP each year and get tax-relief. In theory I can pay in more, but won’t get the tax benefits.
Granted, I’ll have to wait until the minimum pension age (currently 55) to start to take the money out, but that actually works in my favour when trying to build my pot to be worth half a million. Here’s my plan.
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Don’t change what’s working
Even though some might be unfamiliar with a SIPP as a product, the investment side of things is exactly the same as I’d do for any account. If I was investing in a regular brokerage account, an ISA, or any other alternatives, the key thing is getting the right strategy.
To this end, I feel one of the best ways to try and grow wealth to £500k is via dividend stocks. Picking stocks that pay out regular income that can be reinvested provides me with a pot that should continue to grow.
I could build my strategy around growth stocks instead. For some companies in this bucket, the share price appreciation could massively exceed what I could hope to make from dividends. Yet picking the next big thing is very hard. Even with a diversified portfolio, I think the lower risk option is to go with dividend stocks instead.
Reinvesting and compounding
In practical terms, I can set up my SIPP to make regular or one-off contributions. I’d go for a regular monthly contribution.
I’m not going to be close to hitting the £3,333 (£40k divided by 12) monthly allowance. Yet however much I decide to invest, it’ll be able to grow over time.
Each month, I’d select dividend stocks I like at that point in time. It’s not a case of picking a handful and just investing in the same ones each month. New ideas come along, certain companies boost or cut payments, as well as various other factors that influence my decisions.
My exposure to the shares I pick will naturally grow over time. This is because when I get paid a dividend I’ll buy more of the same stock using that money. This allows my pot to compound and grow faster in the future.
The path to £500k
Running the numbers can help in seeing how long things could take. I’m going to assume an average dividend yield of 7.5%. I’ll aim to invest £500 a month. I’m also going to assume that I’ll put in a £5k lump sum into the SIPP to kick things off.
Remember that I can’t take the money out until I hit 55 anyway (I’m in my 30’s now), so the fact that my target will take decades doesn’t really bother me.
Using those figures, it’ll take 26 years to reach my goal. I think this works out well, but have to take any planning that far out with a pinch of salt. Investing more or less could make the timescale shorter or longer. I’m targeting a fairly punchy dividend yield so, in reality, a lower yield would push the time back further.
Ultimately, a SIPP is a great home for an investment pot, to build funds to enjoy in retirement.
