How much can someone hope to have in their Self-Invested Personal Pension (SIPP) by the time they retire?
The answer to that question depends on three main variables.
First, what is the timeline?
In this example I presume a retirement age of 67 – so for someone who is 40 today, that means a 27-year timeframe.
The second variable is the amount invested.
Here I assume £600. In reality, everyone is different and will make their own choices about how much they can afford to put aside regularly into their SIPP.
Small differences can be magnified by time
The third variable is the compound annual growth rate achieved over the lifetime of the SIPP.
What seem like small differences can have a big impact, thanks to the compounding effect over a long timeframe.
For example, at a 5% compound annual growth rate, today’s 40-year-old contributing £600 a month will have a retirement fund at 67 worth around £402,600.
At an 8% compound annual growth rate, though, that fund will be almost £652,000. That is a big difference!
Choosing a realistic strategy for investing
That 8% compound annual growth rate does not necessarily require an 8% dividend yield (or any dividends at all, in fact).
It is a combination of dividends plus capital growth, minus any capital loss from shares sold for less than they cost.
So, in today’s market I think it is achievable.
But not everyone investing in a SIPP has much, or any, experience and they may not want to spend large amounts of time monitoring their investments over the next quarter of a century or so.
I think it helps to take a realistic approach – not being too greedy, sticking to what you understand, diversifying across a range of shares and weighing risks seriously.
On top of that, it makes sense to choose a SIPP that is competitive in terms of the fees it levies, as they eat into overall returns.
One share to consider for a SIPP
To illustrate that approach, one share I think investors should consider is insurer Aviva (LSE: AV).
Its current dividend yield of 6.7% would already go a significant way towards achieving an 8% compound annual growth rate. The annual dividend per share has been growing strongly in recent years, following a cut in 2020.
The Aviva share price is up 8% over the past year and has more than doubled over five.
I think the business can potentially keep performing strongly. Insurance is a market with high, resilient demand and Aviva has a commanding position in the UK’s general insurance sector.
That could get even stronger with its proposed takeover of rival Direct Line. That should offer economies of scale, although I also see a risk that Direct Line’s mixed performance of recent years could continue, acting as a drag on Aviva.
Still, with a proven business model, strong market share and juicy dividend, I see Aviva as a share SIPP investors should consider.
