How to try and build a £1,000,000 SIPP with just £500 a month

Zaven Boyrazian breaks down how regularly investing £500 a month inside a SIPP could build a £1m retirement fund in the long term.

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Self-Invested Personal Pension (SIPP) is a marvellous financial tool for investors building wealth for retirement. The numerous tax benefits combined with a pound-cost-averaging strategy can lead to spectacular results. In fact, drip feeding just £500 a month could be all that’s needed to push a pension pot over the £1,000,000 threshold. Here’s how.

Building that fund

SIPPs come with several restrictions. The most prominent of which is that investors can’t access their wealth until turning 55. And this barrier is being lifted to 57 in 2028, with further hikes likely in the future. However, for investors specially aiming to build a sizable pension pot, that’s hardly a dealbreaker, especially considering the benefits.

Any money injected into a SIPP is eligible for tax relief. In other words, any income tax paid on capital is refunded and made available for investments. For example, let’s say an investor is in the 20% UK tax bracket. By depositing £500 into a SIPP, they’d receive an extra £125 as a tax refund, resulting in a total capital of £625. And that’s more than enough to reach £1m in the long run.

Let’s assume the FTSE 100 continues to deliver its 8% average total return for the foreseeable future. Starting from scratch, investing £625 each month at this rate of return would build a seven-figure pension pot within 31 years. And considering the average career lasts 37 years, starting sooner rather than later could pave the way to an earlier retirement.

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.

Even more wealth?

Obviously, waiting around for three decades isn’t the most exciting process in the world. And sadly, the age withdrawal restrictions of a SIPP put a limit on how much quicker an investor can access their wealth. However, there’s nothing stopping them from building up an even larger pension pot to enjoy at the age of 57.

This is where stock picking enters the equation. Instead of throwing money into a passive index fund, investors can target specific businesses to strive for chunkier returns. And one British company from my portfolio that I believe has market-beating capabilities is Alpha Group International (LSE:ALPH).

The fintech group provides currency risk management as well as alternative banking solutions to small- and medium-sized businesses. While it’s not short on competition, management has sucessfully carved out a lucrative niche that’s translated into chunky cash flows growing at a rapid pace. With that in mind, it’s not surprising the share price has averaged a 21.9% annual return over the last five years!

Even if the company beats all the odds and becomes an industry leader (which is a big “if”), sustaining a nearly 22% annual return will be exceptionally difficult. However, even if it only delivers half of its historical average, that’s enough to send a SIPP higher by another £750,000 to £1.75m!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Zaven Boyrazian has positions in Alpha Group International. The Motley Fool UK has recommended Alpha Group International. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

Investing freedom — but inside a pension

Strapped consumers might be cutting back on investing, but they’re still keeping up their pension contributions. The only problem? A…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Forget gold! I’d rather buy these 3 FTSE high-yielders in a Stocks and Shares ISA

Gold looks like a risky investment to me as the price hits an all-time high. I'm ignoring the fuss to…

Read more »

Young female business analyst looking at a graph chart while working from home
Growth Shares

This 55p UK stock could rise more than 300%, according to a City broker

This UK stock has fallen from above 800p to below 60p. But analysts at Citi believe it’s capable of a…

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

I think this FTSE 250 trust has all the right ingredients to lock in long-term profits

Today I'm examining the prospects of a private equity investment trust on the FTSE 250 that caught my attention recently…

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

2 under-the-radar UK shares investors should consider snapping up

Two UK shares have caught the eye of our writer. She explains why investors should be taking a closer look…

Read more »

Investing Articles

Are these 2 ultra-high-yielding income stocks a good buy for me?

These two income stocks often split the debate amongst investors. So what does our writer think of them as potential…

Read more »

Senior woman potting plant in garden at home
Investing Articles

5% yield! This dividend stock could be great for my retirement

Our writer explains why this dividend stock appeals to her as she’s investing to build wealth to enjoy in the…

Read more »

A young Asian woman holding up her index finger
Investing Articles

I’d aim for a second income of £1,000 a month with this super-reliable dividend stock

I think a great way to build a second income stream is by investing in dividend stocks via a Stocks…

Read more »