When it comes to building long-term wealth, few strategies are as powerful as starting early and letting compounding do the heavy lifting. This is why I started a Junior SIPP (Self-invested Personal Pension) for my daughter shortly after she was born.
My daughter is currently one (p.s. that’s not us in the picture) and her SIPP is already worth a little under £4,000. However, that’s just the start. Let’s explore how it can grow.
Compounding for an early retirement
I recently ran the numbers on my daughter’s Junior SIPP, assuming £300 monthly contributions (that’s £240 from us and £60 in tax relief from the government) and a 10% annualised return. I’ve also factored in a 2% annual increase in contributions because she’ll likely contribute more when she’s older.
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.
The results are astonishing. By her 61st birthday, her pension pot could be worth close to £19m.
The magic lies in the combination of consistent investing and the exponential growth of compounding. In the first decade, the pot grows steadily, reaching around £75,000. But as the years pass, the growth accelerates dramatically.
By year 30, the balance crosses £870,000, and by year 40, it’s nearly £2.5m. The final two decades are where compounding truly shines. This is when her pot surges from £4.1m at age 46 to almost £19m by age 61.
Starting young
Starting young is the ultimate advantage. Even modest contributions, when paired with time and a sensible investment approach, can snowball into life-changing sums.
While annual contribution increases aren’t yet possible for a Junior SIPP, it’s reasonable to expect that as she grows older, and it converts to a normal SIPP, she will contribute herself.
Of course, these figures assume a steady 10% return, and there’s no guaranteed return in real markets. Investors can lose money.
However, this example highlights the incredible potential of long-term, disciplined investing. For parents and grandparents, opening a pension for a child is one of the most generous gifts imaginable.
Where to invest?
I use Hargreaves Lansdown for my daughter’s SIPP. There are trading fees with a SIPP, unlike the Junior ISA. As such, I prefer to achieve diversification, at least for now, by investing in funds, conglomerates, and investment trusts.
One of her investments is Berkshire Hathaway (NYSE:BRK.B). The Warren Buffett-run conglomerate is a hugely popular investment despite the great man’s impending retirement. The business owns and invests in core parts of the American economy, owning insurance groups and railways, and investing in companies like Chevron and Visa.
The company has consistently outperformed the S&P 500 over several decades, thanks to Warren Buffett’s disciplined, value-oriented approach and significant cash reserves, which provide resilience during market downturns. Berkshire’s focus on stable, cash-generative businesses makes it attractive for conservative investors seeking steady growth.
However, there is always risk. Some may talk about succession challenges while others will point to its focus on the US economy. Once a positive, this US focus may be a drag in the coming year — it’s very hard to tell.
Nonetheless, it’s a diversified investment that I believe will outperform over the long run. Definitely worthy of consideration by all.
