Leveraging the power of a Self-Invested Personal Pension (SIPP) is one of the best ways to start building retirement wealth in the stock market. And looking at the latest data from the Office for National Statistics, it’s a step that many Britons may need to consider.
The average pension savings among 60-year-olds is £228,200 for men and £152,600 for women. Yet following the 4% withdrawal rule, that’s barely enough to generate the £14,400 recommended by the Pensions and Lifetime Savings Association to maintain a minimum retirement lifestyle, let alone a moderate or comfortable one.
With that in mind, let’s explore how investors can leverage a SIPP to try and build a £1m pension pot.
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How to start
- Open a SIPP
- Deposit capital regularly
- Research investment opportunities
- Buy and hold for the long run
- Monitor and review
Different SIPP providers charge different fees, and it’s important to compare to find the most suitable platform. It’s also essential to regularly allocate money from a monthly paycheque to a SIPP so there’s capital available to buy quality shares.
Researching investment opportunities is where a lot of hiccups can occur. And for investors who don’t have the time, knowledge, or interest in picking individual stocks, an index fund might be a more suitable approach.
Once the investment decisions have been made, it’s just a matter of executing the trades and holding on for the long run. But of course, investors need to keep their fingers on the pulse to make sure their investment thesis isn’t slowly breaking.
Aiming for a million
Thanks to the tax relief provided by a SIPP, a lot of capital can be built quickly. For example, let’s say an investor’s contributing £500 a month into their pension pot. After tax relief, they could have anywhere between £625 and £1,100, depending on their income tax bracket.
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.
Given enough time, it’s not that difficult to turn £625 a month into £1m. For example, the FTSE 100 has historically provided an average annual return of 8%. And investing £625 a month at this rate would reach £1m within 31 years.
But with stock picking, it’s possible to unlock an even higher return and shorten this journey considerably. Take AstraZeneca (LSE:AZN) as an example.
Today, the healthcare group’s one of the leading forces in cancer therapy, and novel drugs are being used worldwide. But 20 years ago, it was still an up-and-coming pharmaceutical business with a promising pipeline of medicines. Investors who saw the opportunity and capitalised on it have since enjoyed a 13% annualised return.
At this rate, the journey to a million would only take 23 years. And for those happy waiting for the full 30, their SIPPs could reach almost £3m!
Replicating this growth trajectory for new shareholders is likely going to be a challenge with AstraZeneca. After all, even with its impressive current pipeline of drugs, growth is much harder being a £165bn market-cap company. And all it takes is one unfavourable clinical trial result for a new blockbuster drug to send the share price plummeting.
However, it goes to show that by buying and holding quality businesses for the long run, investors can potentially reap tremendous returns.
