Drip-feeding money into a Self-Invested Personal Pension (SIPP) throughout a career can help individuals reach a seven-figure retirement portfolio. Apart from reaping the wealth-building benefits of compounding, SIPPs also provide a powerful advantage in the form of tax relief. And that extra bonus can make an enormous difference…
Compounding to £1m
Let’s say an investor is able to make some good stock-picking decisions and secure an average annualised return of 10% for the foreseeable future. By living a bit frugally, they’re able to put aside £700 each month from their wages, which goes directly into a SIPP.
Since they’re in the Basic income tax bracket, each deposit gets a lovely 20% boost from the government. Suddenly, that £700 transforms into £875. And investing £875 at a 10% return when starting from scratch will eventually reach £1m within roughly 24 years.
That means even someone in their 40s with no retirement savings can still potentially reach millionaire territory in time for retirement.
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.
Investing intelligently
While the prospect of joining the top 1% is undeniably exciting, it’s worth remembering that inflation will chip away at some of this spending power. At the same time, if the stock market decides to throw a tantrum, investors could end up with less than expected come retirement. Yet all of this is moot if bad investments are made in the first place.
Finding winning stocks is a tricky process. After all, there are over 1,500 companies listed on the London Stock Exchange, but only a small minority will deliver market-beating returns. Fortunately, a lot of losers can be filtered out by looking for specific key traits.
Eliminating pre-revenue and non-free cash flow generating enterprises from consideration wipes out a lot of exceptionally risky stocks. Then, when setting minimum requirements for growth and profitability, while also hunting for significant competitive advantages, the list is whittled down even further.
It’s a simple strategy that can do an enormous portion of the work. And while there’s still plenty of research and analysis to go, it’s how I’ve stumbled upon almost all of my outperforming investments.
A top SIPP stock to buy now?
Applying these filters is how I stumbled upon Games Workshop (LSE:GAW). Since my initial investment in late 2022, the stock has more than doubled, vastly outpacing the FTSE 100. And looking at its financials, it’s not difficult to understand why.
Over the last five years, revenue has grown by an average 14.3% annual rate. Thanks to margin expansion courtesy of exceptional pricing power, earnings have been increasing even faster by 17.6%. And on a free cash flow basis, margins stand at a staggering 28.7%, placing the return on invested capital (ROIC) at a jaw-dropping 63%!
While impressive, the business still has its risks. Given that the US is a key market, but all manufacturing is done here in the UK, Games Workshop is exposed to the threat of US tariffs. That’s not a problem for its royalties from licensing the Warhammer IP. However, even this venture suffers from execution risk that could negatively impact brand value, or struggle to convert TV series’ viewers into hobby collectors.
Nevertheless, Games Workshop continues to go from strength-to-strength, in my mind. That’s why, even today, I think investors may want to take a closer look.
