I opened a Self-Invested Personal Pension (SIPP) for my two-year-old daughter when she was born. It’s doing well and if it continues at the same rate — with our contributions and state tax relief — it could be worth around £250k by the time she’s 18.
Of course, she can’t touch it until she approaches retirement age, and I have no idea what that will be in the 50/60 years time. But the real driver is compounding. After 55 years, the same calculation could take our £300 a month and 12% annualised growth rate to £22m.
So when is the best time to open a SIPP? Well, yes, at birth. The longer the portfolio has to compound the better. Of course, this is dependent on making the right investment decisions. We need them to keep us moving in the right direction.
The tax relief on a junior SIPP is also really important. The 20% relief allows parents or family members to turn a £2,880 annual payment into a £3,600 total investment. This makes a huge difference over the long run.
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.
A stock for the job
Some of the first investments I made in my daughter’s SIPP were diversified options like Scottish Mortgage Investment Trust and The Monks Investment Trust. I wanted that exposure to growth early on but also that diversification.
But I’ve also invested in some of the stocks at the heart of the artificial intelligence (AI) revolution. Yes, there’s lots of near-term volatility, but that doesn’t matter in a SIPP because we’re investing for the very long term. She’s up over 300% on Celestica and doing well with Micron.
Another stock that I think is well-suited to the SIPP is Nvidia (NASDAQ:NVDA). It’s the kingpin of the AI revolution, providing the GPUs that train and run the world’s most advanced models. Demand remains supply-constrained, margins are exceptional, and its CUDA ecosystem entrenches switching costs.
Amazon, Meta, Alphabet, Microsoft, and Oracle have Capex budgets $650bn for the year ahead — far ahead of market expectations — and a good proportion of this will be spent on Nvidia’s hardware.
And remember, that’s just five clients. The opportunity remains huge. McKinsey thinks that by 2030, companies will be spending $7trn annually on AI.
The current consensus forecast suggests Nvidia’s annual sales will reach $575bn by then.
No longer expensive
None of this would matter if Nvidia looked expensive as a stock. But it doesn’t anymore, trading around 22.3 times forward earnings.
That makes it cheaper than the global tech sector average, and its growth potential remains huge. Analysts have forecasted earnings per share growth around 36% annually over the medium term.
Bring it all together, and on paper it’s a great long-term compounder. Of course, investors should be aware of the risks and that could involve more hyperscalers — like the aforementioned companies — building their own chips. It’s hard to see Nvidia being displaced however.
For me, it’s absolutely worth considering.
