Combining the power of pound-cost averaging with the tax relief benefits of a Self-Invested Personal Pension (SIPP) can potentially accelerate the wealth-building process. That’s especially true in the current market climate, with so many top-notch stocks trading at a discount. And intelligently drip-feeding £450 each month into potentially winning investments could propel a pension pot into millionaire territory. Here’s how it may be possible.
Aiming for a million
Using a SIPP to invest comes with a lot of caveats. Most notably, once money has been injected, it can’t be withdrawn until reaching the age of 55. As of 2028, this threshold is set to increase to 57. And it could be a lot higher in the future.
However, any money that does get put in provides a nice lump of tax relief equal to the tax rate paid by the investor. So if an investor is on the basic tax rate of 20%, each £450 lump sum gets topped up to £540, resulting in more capital to invest with. Over the course of a year, that’s the difference between £5,400 and £6,480.
So how long would it likely take to turn these monthly contributions into a million pounds? While there are no guarnatees, historically the FTSE 100 has delivered returns of around 8% a year, including dividends. And if an investor were to replicate this through an index fund, the journey to millionaire territory could be finished within 33 years.
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.
Shortening the waiting time
That’s a nice way to aim to secure a more luxurious retirement. But waiting just over three decades is less than ideal. Even more so since a poorly-timed crash or correction could make investors wait far longer.
This timeline can potentially be accelerated. The most straightforward way is to inject more money. Even an extra £100 (plus £20 from tax relief) each month can cut two years off the waiting time. But money put into investments should only be sourced from excess earnings.
After all, investors financially overextending themselves could end up in a heap of trouble, especially since money put into a SIPP can’t be accessed again until after passing the minimum age requirement.
So instead, investors should consider striving to increase the annual return through stock picking.
Generating market-beating returns
One of the biggest advantages of index investing is that it provides a near-hands-free investing journey with very low knowledge requirements. Stock picking isn’t as forgiving and demands far more attention and dedication.
Like any house, a portfolio that’s badly built and poorly maintained will most likely crumble into rubble, destroying wealth rather than making more of it. Learning to pick stocks doesn’t happen overnight. And even if an investor becomes a master investor, promising well-researched investments can still fall short of expectations.
The last few years serve as a perfect example of external disruptions throwing a spanner into the works of even the most prominent businesses today. That’s why diversification is paramount.
By spreading capital across multiple top-notch stocks, the impact of one failing can be mitigated by the success of others. And since capital is being drip-fed each month, a portfolio automatically gains the benefits of pound-cost averaging. Should a portfolio position suddenly take a nose dive due to short-term challenges, investors will have more capital at hand to snap up more shares at a discount.