A Self-Invested Personal Pension (SIPP) is one of the best ways to build wealth for retirement. Even more so than gold, in my opinion. That may seem like a foolish statement, given the price of the shiny yellow metal has recently broken through the $3,000 per ounce price tag.
The last 12 months have been a phenomenal year to hold this commodity, with gold prices up almost 43%. And yet, when looking at the long-term performance, the average annualised return of gold is still only 4.7%.
That’s better than most savings accounts right now. But it pales in comparison to what the stock market can and has offered for decades. And for investors with a long time horizon, capitalising on stock market opportunities in a SIPP could be the key to a wealthier retirement.
Leveraging tax relief
A key advantage unique to a SIPP is the tax relief it provides. Whenever money is deposited into this account, the funds have already been taxed. But, since SIPPs have the same tax benefits as employer pension plans, investors receive a tax refund on par with their income tax bracket.
For example, let’s say an investor is paying the Basic rate of 20%, and they’ve just deposited £1,000 into their SIPP. After tax relief, they actually end up with £1,250 of capital to invest.
Suppose a SIPP portfolio were to match the stock market’s historical average return of 8% for 25 years. In that case, investing £1,000 each month would build a nest egg worth just shy of £1.2m. By comparison, at gold’s 4.7% average return, this milestone would take approximately 33 years to hit.
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.
Exploring alternatives
What if there was a way to capitalise on the rise of gold while having the return characteristics of the stock market? That’s actually possible by directly investing in gold mining enterprises. And one of the biggest in the world is Fresnillo (LSE:FRES).
Following the recent surge in gold prices due to geopolitical and trade uncertainty, the Mexican mining enterprise has enjoyed a massive boost to its revenue and earnings. In fact, the company just reported its highest-ever cash profit of $1.55bn, translating into a record $547.5m dividend paid out.
Subsequently, Fresnillo shares more than doubled the performance of gold prices, rising by over 100% compared to 43%. And with various projects in development to further expand its production capacity, the stock looks set to continue outperforming in the future.
Of course, with higher return potential comes greater risk. The political environment in Mexico isn’t entirely mining-friendly, with a proposed ban for open pit mining circulating in the Mexican Congress.
If such a bill were to be passed into law, Fresnillo’s future growth potential could be in jeopardy. And just as the stock surged, it could just as easily come crashing down – a risk I’m personally not willing to take.
The bottom line
While gold may not be the greatest wealth-building asset class historically, it still serves as a robust hedge against inflation. That makes it an ideal choice for investors seeking to protect their wealth. And with gold exchange-traded funds, it’s possible to hold the commodity within a SIPP.
However, for investors seeking to build wealth, considering an investment in quality companies may be the superior strategy.
