I’d drip-feed £700 each month into a SIPP to try and become a pension millionaire

By investing money in a SIPP each month, investors can build up a mountain of wealth in the long run that may even grow into seven-figure territory.

| More on:
Content white businesswoman being congratulated by colleagues at her retirement party

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.

Leveraging the power of a Self Invested Personal Pension (SIPP) takes saving for retirement to a new level. There are many different ways to prepare for the end of a career. Long-term savings accounts and government bonds can offer attractive, near-risk-free returns. Meanwhile, mutual funds allow investors to put capital to work while having everything managed by a professional.

But a SIPP enables investors to take things into their own hands. By being in control, it’s possible to custom-tailor an investment portfolio capable of delivering far superior returns versus traditional retirement savings methods. And in the long run, when investing a lump sum each month, this could be the difference that pushes a nest egg into seven-figure territory.

Building wealth without taxes

Investing in the stock market comes with costs such as commissions and account fees. However, an expense that’s often overlooked is capital gains and dividend taxes. With HMRC constantly knocking at the door, the speed at which wealth builds can be slowed significantly.

But with a SIPP, that’s no longer a problem. In fact, apart from being immune to capital gains and dividend tax, putting money inside this type of account actually provides tax relief. Money that’s deposited into a SIPP is eligible for a tax refund based on an individual’s income tax bracket.

For those paying the basic rate, that equates to 20% relief. This means for each £700 deposited, investors actually end up with £875 of capital to work with. Eventually, taxes do re-enter the picture when the time comes to withdraw money during retirement. But by eliminating them during the wealth-building process, investors can end up being significantly better off.

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.

Stocks or index funds?

By investing in low-cost index funds, investors can mimic the performance of the stock market. And over the long term, that’s proved to be quite a lucrative strategy. For example, the FTSE 100 has historically delivered average returns of 8% per year. And £875 invested each month at this rate could build a £1m pension pot within 27 years when starting from scratch.

Sadly, historical performance is rarely a good indicator of future results. There’s no guarantee the FTSE 100 will continue to deliver this rate of return over the next three decades. And should it fall short of expectations, investors may end up with less than they’re expecting.

This is where stock-picking enters the mix. For those comfortable taking a more hands-on approach to building wealth, investing in top-notch individual businesses offers the potential for market-beating returns. Of course, this also comes with additional risk.

Take BAE Systems (LSE:BA.) for example. The aerospace and defence firm has been firing on all cylinders lately as both the UK and US governments ramp up military spending. The tragic conflicts in Ukraine and Gaza are generating huge demand for the firm’s technologies, resulting in double-digit growth in sales and underlying profits.

As a result, the stock is up almost 50% over the last 12 months! But whether this momentum will continue is a bit uncertain. At a price-to-earnings ratio of 23 versus its average of 13, it suggests the stock is now trading at a premium. As such, the risk of volatility is rising. And as a business operating in a cyclical industry, once demand starts to wane, the share price could be sent tumbling.

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 no position in any of the shares mentioned. The Motley Fool UK has recommended BAE Systems. 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

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Growth Shares

I bought 319 Scottish Mortgage shares for my SIPP in January. Here’s how they’ve done

Scottish Mortgage shares were out of favour in January so Edward Sheldon bought more of them for his pension. Was…

Read more »

Investing Articles

Is Tesco’s share price still a bargain after rising 26% over a year?

Recent results show Tesco is still growing its leading market share, and despite its share price gains this year, it…

Read more »

Investing Articles

Is this FTSE 250 gem the next big thing in defence sector shares?

This FTSE 250 defence firm was founded by the MoD, has seen its order book and profits swell, and is…

Read more »

Investing Articles

Here’s what the National Grid share price fall could mean for passive income investors

It's long been seen as one of the FTSE 100's best stocks for durable dividends. What does the recent National…

Read more »

Female florist with Down's syndrome working in small business
Investing Articles

£6,000 in savings? Here’s how I’d try to turn that into a £500 monthly passive income

With careful planning and patience, it’s not hard to earn a passive income with UK shares. Here’s one way to…

Read more »

Investing Articles

Here’s how I’d aim for a second income of £1,000 a month, with just £10 a day

How much do we need to build a decent second income? With enough time, we could do it with a…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Down 12% in a month, is this the FTSE 250’s most overlooked gem?

Our author thinks Kainos is one of the most overlooked FTSE 250 gems. Here's why he thinks the future could…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

Just released: our 3 best dividend-focused stocks to consider buying before July [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »