When it comes to retirement wealth building, few financial tools come close to the Self-Invested Personal Pension (SIPP). Apart from granting all the same financial benefits as a private pension through an employer, SIPPs put retirement savers in the driver’s seat, allowing them to leverage the compounding returns of the stock market.
What’s more, even with just a 10-year time horizon, investing £500 a month is enough to build a portfolio capable of beating the current State Pension by quite a wide margin. In fact, some investors have already done just that.
Building retirement wealth
Let’s say it’s 2015, and an investor has just turned 50 with no savings with the goal of retiring at the age of 60 in 2025. Their income allows them to comfortably invest £500 each month, which, when put into a SIPP, turns into £625, thanks to pension tax relief.
By leveraging a FTSE 100 index fund, they’ve been able to generate a total return of 82.9% over the last decade, or 6.2% on an annualised basis. Investing £625 at this rate for 10 years translates into a SIPP worth £103,544. And by following the 4% rule, that’s enough to generate a retirement income of £4,142 a year.
How does this compare against 10 years’ worth of contributions to the UK State Pension? Ten years of qualifying payments entitles an individual to 10/35ths of the full £230.25 per week. Scaling that up to an annual income translates into a retirement income of just £3,420 – over £700 less (although it’s guaranteed, which share investing isn’t).
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.
Improving investment returns
Investors who beat the State Pension with a basic index fund over the last 10 years are understandably chuffed. However, those who ventured into the world of stock picking might be even happier.
Several FTSE 100 companies have achieved far better returns than 6.2%, with stocks such as Halma (LSE:HLMA) delivering close to a 260% gain or 13.6% a year. To put this into context, £625 invested monthly at this rate has produced a retirement income of £6,323.
Halma’s success comes on the back of consistent financial performance with high-profit margins and rising revenue. Since demand for safety, healthcare, and environmental analysis rarely fall out of fashion, even in economic downturns, the firm has had little trouble expanding its footprint both organically and through acquisitions.
For shareholders, that’s translated into solid share price growth and 45 years of consecutive dividend hikes. Of course, just because Halma has excelled over the last 10 years doesn’t mean the next decade will be the same.
Being a highly acquisitive enterprise can be a double-edged sword. After all, takeovers aren’t cheap. And if they fail to live up to expectations it can saddle a balance sheet with an unwanted debt burden. There’s also an element of customer concentration, especially in the group’s environmental-focused segment, which could adversely impact future profits if relationships start to break down.
With the State Pension likely to change (hopefully increasing) over the next decade, pushing an investment portfolio to strive for higher returns might be prudent. So for investors seeking to retire 10 years from now, Halma and other winning stocks just like it might be worth a closer look as a potential investment within a SIPP.
