By leveraging the power of a Self-Invested Personal Pension (SIPP), investors have the potential to drastically improve the quality of their retirement lifestyle. In fact, by making the right moves, even those with no savings at the age of 40 can still go on to enjoy a substantial seven- or even eight-figure pension pot.
The power of a SIPP
Let’s say an investor’s just turned 40. And following a brief mid-life crisis, they’ve decided retirement planning is essential before they turn 67. So much so that they’re going to start putting aside £850 each month to fund a SIPP.
Unlike a general investment account or ISA, SIPPs provide tax relief on deposits equal to an individual’s income tax band. That means someone paying the basic rate of 20% will receive a 20% top-up from the government on each deposit, transforming a £850 lump sum into £1,062.50.
Investing this capital each month at the stock market average rate of 8% will grow a pension portfolio into an impressive £1,212,717 after 27 years. Following the 4% withdrawal rule, that translates into a retirement income of £48,509 a year.
Topping it up with the £11,973 from the UK State Pension brings the total to £60,482 a year. But while earning £60k can go a long way today, that’s not likely to be the case 27 years from now due to inflation. Luckily, this is where stock picking offers a potential solution.
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 for the long run
Rather than using index funds, investors can take control and craft a custom portfolio of only the best businesses. This process is far more hands-on and undeniably comes with more risk. But it can also open the door to phenomenal returns.
Looking back at the last 27 years, Clarkson (LSE:CKN) is a perfect example of how stock picking can deliver game-changing returns.
Since 1998, the shipping brokering business has delivered a jaw-dropping 14,505% total gain. That’s the equivalent of 20.3% a year. And anyone who invested £1,062.50 each month into Clarkson shares over the last 27 years is now sitting on a staggering £14.3m. Fun fact: that’s enough to earn £573k a year without needing to lift a finger!
Still worth considering?
Today, Clarkson is the largest shipping service provider in the world. And it plays a critical role across multiple tailwinds, including offshore wind power deployment, shipping re-routing, fleet financing, and even global vessel upgrades.
Yet, shipping’s also a cyclical sector. US tariffs and growing geopolitical tensions have already had an adverse impact on demand. And with freight rates starting to drop, Clarkson’s broking revenue has suffered, causing some volatility in its share price. And given that the stock trades at a premium, more volatility could be on the horizon. Even more so if seaborne volumes continue to suffer in the near term.
Nevertheless, given Clarkson’s impressive track record of navigating down cycles, these drops might be lucrative long-term buying opportunities. Having said that, with a market-cap now above £1bn, its days of delivering 20% annualised returns might be in the rear view mirror.
So while I think this FTSE stock’s definitely worth investigating further, investors hunting for such strong double-digit gains may need to look elsewhere. Fortunately, there are plenty more exciting growth opportunities to explore today.
