A Self-Invested Personal Pension (SIPP) can be a great way to build up a nice fat retirement pot.
Couple it with a Stocks and Shares ISA, and I’d say we have a terrific two-pronged approach to investing for our futures.
Still, getting to a million pounds in a SIPP might sound like a tall order. For most of us, it could seem like nothing more than a pipe dream.
But a lot of investors have already reached a million in their SIPPs. So it really is possible, but how could we do it?
Hargreaves Lansdown alone has more than 3,000 clients with more than £1m in their SIPPs. And that’s just one investment services provider.
So how do they do it?
Well, the key secret for building a big pension is to start as young as possible. If we stash away a fixed amount from our first salary in a SIPP every month, we’ll never miss what we didn’t have.
And then bump it up through pay rises, career moves, and any windfalls. It’s surprising how even modest sums could grow and grow.
Imagine someone aged 20, putting away money every month into a SIPP.
Over the past 20 years, The FTSE 100 has returned an average of 6.9% per year. It’s very up and down, though. And sometimes, like when the pandemic hit, the stock market can crash.
And the Footsie might not earn the same in the future.
But for more than a century, UK shares have beaten other forms of investment hands down, through good times and bad.
£450 per month
If our future pensioner could achieve that average of 6.9% per year, they’d need to invest around £450 a month to reach a million by age 60.
It would be nice to be able to retire a millionaire at 60, wouldn’t it?
They might not be able to afford that much right away, but steadily raising their contributions over the years could make a big difference.
This doesn’t account for inflation. But if that evens out at the hoped-for 2% a year in the long term, lifting our contributions by an extra 2% a year shouldn’t cause too much pain.
If I’m talking about SIPPs, I have to mention the lifetime limit.
At the moment, the most anyone can hold in pension savings is capped at £1,073,100. Anything above that is taxable, possibly heavily.
But the good news is that the government will abolished this limit in April 2024. And quite right too, in my view — why should an investor be punished for being too successful?
There are other tax rules too, but I can’t cover them here.
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.
Anyway, what are the so-called millionaire secrets that I’m supposed to be revealing?
Well, I’ve actually already covered them, and they’re really not so secret at all.
Start investing in our SIPPs as early as possible, invest as much as we can, and keep upping it each year, in real terms ahead of inflation.
Oh, and most SIPP millionaires invest in stocks and shares.