A self-invested personal pension (SIPP) is a great investment tool that working people can use to invest tax efficiently. Whichever is lower between my annual income and £60,000 is the maximum amount I can contribute into my SIPP during the tax year to get the tax break. Here’s what I’d buy (and avoid) to try and grow the SIPP to £1m.
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.
Compounding income gains
The stock I’d buy now is Aviva (LSE:AV). This might seem a bit odd, given that the share price has actually fallen by 5% over the past year. Further, the business posted a loss of £1.14bn in the last full financial year.
My reason for including this in a SIPP is more from the income angle. The current dividend yield is 7.82%, making it one of the highest options in the FTSE 100. When I consider that my SIPP is for long-term investments, I think this compounding of regular income could be perfect. Over time, this yield should help snowball the value of my holding significantly.
The loss from 2022 was more of an accounting loss, based on adverse market movements and value of underlying assets. The H1 2023 results showed a much better picture, with a high solvency ratio and an 8% jump in the interim dividend versus the same period last year.
With a forecast year-end jump in the dividend to 23p per share, the trend is certainly higher. And with a dividend cover ratio of 1.9, I’m confident this isn’t putting the business under undue stress.
The main risk would be a material devaluation of assets caused by panic in the bond or stock market.
Luxury isn’t the place to be
On the other hand, I’d avoid buying shares in the Watches Of Switzerland Group (LSE:WOSG). The share price is down 40% over the past year.
The business did well during the early part of the pandemic. Supply issues and a lack of ways to spend disposable cash (eg on travel) saw a spike in demand for luxury watches. However, this was a temporary period and now we’re in a much different place.
Consumer spending has dried up this year, fuelled by high inflation and high interest rates that have provided the cost-of-living crisis. There’s plenty of chatter that the UK might go into a recession early next year. Based on this outlook, I think the company will continue to struggle going forward.
Further, news broke in Q3 that one of it’s biggest suppliers, Rolex, has bought another watch retailer. Even though both sides claim this won’t diminish the relationship with each other, I don’t really believe this.
I could be wrong in my view, with the latest quarterly results causing the share price to spike 10% on the day. The optimism there could see a continued rally, but I don’t believe it’s a stock that’s going to help me in the pursuit of a £1m portfolio.
