The Self-Invested Personal Pension (SIPP) often plays second fiddle to the Stocks and Shares ISA. It certainly gets a lot less media coverage, despite both sheltering money from tax.
Right now, especially with the 5 April deadline approaching, all we hear is ISA, ISA, ISA.
To a degree, that’s understandable, as most people already have a workplace pension. But most also have cash savings, and it makes a lot of sense to park some of that in a tax-efficient ISA account.
Moreover, money in a Stocks and Shares ISA isn’t locked up. So, if I find the next Nvidia or Rolls-Royce and make a fortune, I could withdraw that cash and hop on a flight to the Maldives to plot my next stock market masterstroke. Piña colada in hand.
With a SIPP, however, I could make a huge return and not be able to touch it. Possibly for decades. Indeed, the age at which I can access my DIY pension is rising to 57 in 2028, up from 55 today.
Another drawback is that the Stocks and Shares ISA is totally tax-free, whereas only up to a quarter of the total SIPP (up to a defined limit) can be taken tax free. The rest will normally be taxable after that.
On the surface then, the ISA appears to beat the SIPP hands-down. However, I do see one massive advantage the latter has over the former…
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.
Don’t interrupt compounding
As mentioned, I can’t take money out of the SIPP. Once it’s in there, it’s tied up for years or even decades.
The same could be true of a Stocks and Shares ISA, of course. And thousands of people have invested their way to ISA millionaire status over the years. That involves taking a long-term approach to the stock market, which is what we advocate here at The Motley Fool.
However, as an ISA portfolio gets larger over the years from either regular contributions of stonking returns (ideally both), it can be very tempting to crystalise gains to spend. Perhaps for a wedding, holiday, or an emergency. Maybe a second home.
There’s nothing necessarily wrong with that, of course. People can do what they like with their money. But as Charlie Munger famously said: “The first rule of compounding: Never interrupt it unnecessarily.”
By not interrupting compounding, a £10,000 SIPP would be worth just under £110,000 after 30 years, assuming a 9% average return.
Long-term compounder
One FTSE 100 stock I feel could contribute towards a SIPP’s long-term performance is Scottish Mortgage Investment Trust (LSE:SMT).
This is a growth-focused investment company that thinks in decades rather than quarters. That is, it aims to invest early in transformative firms that have massive growth opportunities. This strategy led it to Amazon, Tesla, and Nvidia before most others.
Today, the portfolio has meaty stakes in SpaceX, TikTok-owner ByteDance, and internet payments giant Stripe. Note, these firms cannot be bought in the stock market because they’re currently privately held. This makes the trust attractive to me from a growth investing perspective.
Now, one risk here is rising inflation, which is putting pressure on the growth stock valuations. So this could get worse moving forward.
Taking a long-term view though, I think this FTSE 100 stock’s well worth considering, especially for a SIPP portfolio.
