By leveraging the power of a Self-Invested Personal Pension (SIPP), investors can position themselves for a far better retirement lifestyle. And when kickstarting the retirement saving process at the beginning of a career, it doesn’t take much to push an investment portfolio into a seven-figure portfolio. In fact, putting aside just £11 a day, or £77 a week, for a SIPP could be all it takes to retire in style. Here’s how.
Avoiding taxes – the legal way
SIPPs come with multiple advantages. The biggest is related to tax. Any money that’s deposited into a SIPP is automatically eligible for tax relief. The amount of relief ultimately depends on an individual’s tax band. Assuming an investor is paying the Basic Rate, every deposit will be topped up by 20%. So when depositing £77 a week, the tax relief automatically pushes this up to around £92.
What’s more, while the money stays within the SIPP, capital gains and dividend tax are also eliminated. This prevents compounding from being disrupted and translates into more potential wealth, especially over the long run.
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.
So how much money can investors expect to make?
Let’s break it down
According to the European Commission, the average number of years spent working throughout a career is 36. And since its inception, the FTSE 100 has delivered an average annualised return of around 8%. So assuming an investor is able to consistently add £92 of capital into their SIPP each week (after tax relief), how much money would they have at retirement when starting from scratch?
| Year | Portfolio Value |
| 1 | £4,980 |
| 5 | £29,391 |
| 10 | £73,178 |
| 20 | £235,608 |
| 30 | £596,144 |
| 36 | £998,689 |
With inflation likely to continue dragging down the value of money over the next 36 years, £998.7k may not go as far as it does today. However, having a near-£1m pension pot is still likely to drastically improve the quality of a retirement lifestyle.
Nothing is guaranteed
Thanks to index funds, it’s possible to invest capital into the stock market with minimal knowledge. After all, these investment vehicles can be low-cost and automatically handle the entire portfolio management process while replicating the returns of indices like the FTSE 100.
However, there’s a giant caveat to this approach. The FTSE 100 may not continue to deliver 8% gains moving forward. The returns could be higher or lower. And therefore investors may not hit the seven-figure threshold when the time comes to retire.
Stock-picking can help offset this risk. Instead of tracking an index, investors can hand-pick companies and design their own portfolios to try and achieve market-beating returns. Even an extra 1% can drastically improve an investor’s long-term financial prospects.
However, stock-picking requires far more effort and skill. And if executed poorly, investors may end up underperforming the FTSE 100, perhaps even destroying wealth instead of creating it.
This means investing comes with risk, regardless of the strategy used. However, risk can be managed. And In the long run, the potential gains the stock market provides could help drastically improve the quality of life during retirement.
