The SIPP (Self-Invested Personal Pension) has one big advantage when it comes to building wealth. This is that the cash cannot be taken out until a certain age — the perfect setup for the miracle of compounding to work its magic.
The result is that even smallish amounts invested each month can build up into something substantial. Here, I’ll explore how long it could realistically take someone investing £250 a month into a SIPP to build towards a £1m portfolio.
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The time frame
To keep things simple, I’ll base the maths on a basic-rate taxpayer and ignore the retirement tax side. After all, nobody really knows what the pension rules or tax rates will look like decades from now. The government may well move the goalposts.
So let’s imagine someone puts £250 a month into a SIPP. With the 20% government top-up, that contribution is boosted to £312.50. Over a year, this would add up to £3,750.
Ignoring fees, the main variable would be the average total annual return. Again, this isn’t guaranteed, as it could be lower or higher than the long-term market average of 7%-10%.
But if we assume 8.5%, with dividends reinvested, the pot would grow to £1m in just under 39 years. Put another way, a 30-year-old starting from scratch today might realistically build a seven-figure SIPP by retirement age by investing this amount.
Given this decades-long investing horizon, I don’t think there’s any need to swing for the fences inside a SIPP. I reckon it’s preferable to aim for a diversified portfolio of high-quality stocks, investment trusts, and exchange-traded funds (ETFs).
Slow and steady wins the race, as they say.
Resilience over time
The iShares MSCI Target UK Real Estate ETF (LSE:UKRE) could be one to consider for inclusion. It’s made up of UK real estate investment trusts (REITs), property companies, and government bonds.
The top REITs held are Segro, LondonMetric, and Land Securities, all from the FTSE 100. The first two have a lot of logistics and warehousing exposure, while Land Securities is one of the UK’s largest commercial property owners.
From the FTSE 250, it holds Unite Group, which is the UK’s largest student accommodation REIT. It earns income from domestic and international student demand.
Now, as the chart shows, the share price of this real estate ETF has done poorly since 2022. This is due to higher interest rates, which have presented challenges for property companies. Most rely on debt to expand, and this becomes more expensive when rates are high.
Meanwhile, higher bond yields make REIT dividends look less attractive by comparison. So there are risks here, especially with the UK economy struggling for growth.
However, I think now might prove to be a good time to consider investing. UK property has proven very durable across time, while the bonds help diversify the income stream (because individual dividends are never guranteed).
The ETF’s dividend yield is almost 7%, which towers above the UK market average. And with interest rates slowly but surely creeping down, I reckon the share price has a very good chance of recovering over time.
Pair this with that very attractive starting yield, and I think this ETF is a good one to consider for a SIPP.
