A Self-Invested Personal Pension (SIPP) is the secret financial weapon that helps some people enjoy a far more financially secure retirement than they otherwise would do.
But millions of people are not making the most of the opportunities a SIPP potentially offers them. Here are three positive moves they could make to try and change that.
1. Put in more money
Lots of investors obsess about the annual contribution allowance for their Stocks and Shares ISA.
Yet many do not seem to pay anything like as much attention to the question of how much they can, or ought, to put into their SIPP each year.
An ISA and a SIPP are different financial vehicles. Once money is put into a SIPP, it is typically locked in until a certain age, so cannot be as easily withdrawn as is the case with an ISA.
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.
But clearly, one way to build a bigger SIPP in the long term is to put more money in along the way.
2. Get time to work for you, not against you
When is the right time to make such contributions?
Each investor’s situation is unique. But, in general, when it comes to contributing to a SIPP and putting the money to work my approach is the sooner, the better. That presumes, of course, that there are attractive enough opportunities at a given moment.
How much difference does it make to a SIPP if an investor acts now, not later, when funding it and putting it to work?
To illustrate, imagine a £100,000 SIPP that grows at a compound annual rate of 5%.
On a 10-year timescale, that would be worth nearly £163k. If the timeframe is 20 years, that would be over £265k. For 30 years, the value jumps to £432k, while a 40-year investment horizon would turn the £100k into almost £704k.
Remember, the only difference here is timeline. The sooner one gets serious about a SIPP, the more opportunity there is to grow its value.
3. Think about and invest for the long term
When it comes to investing, I favour the long-term approach not only for my SIPP but in general.
The benefits of that can be seen from the compounding example above. But it is important to remember that not all shares do well over time. Some go nowhere, while others actually destroy value.
For example, I still own shares in boohoo (LSE: DEBS) but have recently reduced my stake, making a painful loss in the process.
What went wrong? When I invested, boohoo was coming off a few profitable years, had a good growth story, and looked set to grow its international customer base.
But I perhaps made the classic mistake of paying too much attention to the company’s past performance rather than its future prospects. With a low-cost offering, boohoo was always going to be vulnerable to very cheap rivals like Shein.
Meanwhile, the environmental impact of fast fashion has become a bigger public issue, meaning that the basic business model has come into question.
I have not completely thrown in the towel. boohoo does have a large customer base, some powerful brands and ambition to fix its business. But I think I made a mistake here by thinking too little about the decades-long outlook a smart SIPP investor considers.
