The Self Invested Personal Pension (or SIPP) is a great option for those wanting to take control of their finances and save for their retirement.
Like the Stocks and Shares ISA, those with a SIPP won’t pay any tax on any profits they make or income they receive. Although money can’t be accessed until the age of 55, anything that goes in this account benefits from tax relief. So, someone paying 20% tax on their income would receive a 25% bonus from the government on whatever they deposited (£100 becomes £125, for example). This relief, combined with the magic of compounding over time, can really pay off.
Another advantage to the SIPP is that you can deposit up to £40,000 within the account in a single tax year — double the allowance permitted in a Stocks and Shares ISA.
Now, £40,000 is clearly a huge amount of cash and most of us won’t be able to contribute anything like that. That said, it could be that you’ve recently received a lump sum from a relative, perhaps through an inheritance. If this is the case, £40,000 would thus grow to £50,000 as a result of tax relief. Put to work in the stock market, this could then become a great retirement fund in time.
Before investing a penny, however, I’d be asking myself two questions.
What’s my attitude to risk?
Knowing your own risk tolerance is key. Those approaching retirement may want to take a more conservative approach compared to those a few decades younger because they have less time to recover from any economic shocks before needing access to their money. For this reason, a heavier weighting in volatile small-cap or high-growth stocks might be appropriate for younger investors but not the former.
A better bet for those approaching their golden years is to stick with a diversified bunch of dividend-paying blue-chip stocks that have shown an ability to perform regardless of what’s going on in the economy. Within this, I’d include consumer goods firms and pharmaceutical giants.
But your tolerance to risk isn’t the only consideration when planning for retirement. Deciding what to invest in can also depend on how much effort you’re willing to expend tracking your investments.
How much control do I want?
For those disinterested in the stock market, lacking the confidence to pick individual stocks or wanting to further mitigate risk, buying into funds managed by institutional investors is an option (although be aware that most fail to consistently beat their benchmarks after deducting fees).
For me, the passive approach to investing — buying funds that merely track indices like the FTSE 100 and S&P 500 rather than attempting to outperform them — is the best solution for most people, most of the time. My own SIPP is dominated by this type of investment.
And if you’re looking for a way to do the least possible work, Vanguard’s range of low-cost LifeStrategy funds will give you a portfolio in a matter of minutes. These invest your cash in a range of bond and equity exchange-traded funds in different proportions. The LifeStrategy 60% equity fund, for example, invests that percentage in shares and the remainder in bonds — probably ideal for someone in, say, their 40s.
Assuming a not-unreasonable 7% annual return, that £50,000 I mentioned earlier would become £380,000 after 30 years — an excellent base from which to live a long and comfortable retirement.
Many people think older investors should sell all of their stocks… but here at The Motley Fool UK, we think those people are dead wrong.
To prove it, our UK Chief Investment Advisor has just released a brand-new report detailing 5 of his team’s favourite shares to buy right now...
And because we are convinced that it’s never too late to start trying to build your fortune in the stock market, you can grab a FREE copy of “5 Stocks for Trying To Build Wealth After 50” by clicking here!
Paul Summers has owns shares in Vanguard Life Strategy 80% Equity Fund. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.