As SIPP stands for Self-Invested Personal Pension, it may seem like something that could comfortably be put off until later in life.
That approach can be a mistake, though – and a very costly one!
Time can compound investment returns strongly
To illustrate why, just think about how a longer timeframe can help someone build their wealth prior to retirement.
Imagine someone expects to retire at 67. Perhaps, through smart investing, they could retire much earlier if they wanted to. But say they decide to aim for 67 and invest £500 per month towards that aim, compounding it at 5% annually.
Depending on when they start, the results can be very dramatic, as this table shows.
| Starting age | Portfolio value at 67 (rounded to nearest £1k) |
| 60 | £42k |
| 50 | £145k |
| 40 | £314k |
| 30 | £588k |
| 20 | £1,035k |
Starting at 20, they could retire a millionaire!
More generally, the theme is clear: the earlier someone starts investing, the more they stand to benefit from taking a long-term approach.
A SIPP can add the cherry on the cake
The above example applies to an investment whether or not it is in a SIPP.
But a SIPP can add a lucrative twist.
SIPPs offer tax relief, based on the income tax band of the investor.
So, even for someone who pays at the basic rate of 20%, for each £500 they invest, they will actually have £625 available to invest. (Higher and additional rate taxpayers do even better).
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.
That means that, in the example above, someone starting at 40 will hit 67 with a SIPP valued at approximately £392k instead of £314k. For someone starting at 30, at 67 the SIPP will be worth around £735k, not £588k.
Those are big differences.
But SIPPs also come with some possible downsides. Those include the inability to withdraw cash before 55 and the fact that only a limited portion of the SIPP can be drawn down even then, without being subject to income tax and capital gains tax rules.
One share to consider for the long term
Still, on balance, I think a SIPP can be an attractive proposition for many investors.
I used a 5% compound annual gain in my example above. I see that as a realistic goal in the current market.
One share I think investors should consider is FTSE 100 retailer JD Sports (LSE: JD).
At first glance, that may seem an odd choice. After all, JD’s share price has fallen by three-fifths over the past five years.
Its dividend goes some small way to taking the edge off that fall, but given the paltry yield of 1.2%, the past five years have still been a disaster for shareholders.
However, I think that means the share is now attractively priced given the company’s long-term prospects.
Sure, a weak economic outlook could hurt consumer confidence, eating into people’s willingness to splash cash on fancy footwear.
Over time, though, I think JD Sports’ huge expansion spree of recent years will pay off.
With thousands of shops worldwide, it has a strong brand, economies of scale, industry clout, and a deep understanding of what shoppers want.
At just seven times earnings, I do not think the current share price properly values that massive potential.
