Most investors have probably read that there are a growing number of Stocks and Shares ISA millionaires. But Hargreaves Lansdown revealed last year that the number of SIPP millionaires on its platform had jumped 20% in two years, from 3,166 to 3,794.
To be honest, this didn’t surprise me, as these DIY pensions have a few distinct advantages when it comes to building a sizeable investment portfolio. Here are three of them.
Government top-ups
Once someone pays into a SIPP, the government gives tax relief of 20%. Taxpayers on more than the basic rate can claim back more via self-assessment.
For example, if I put £800 into my SIPP, the government automatically adds £200, bringing the total to £1,000. It normally appears a few weeks later. Because the government top-up is also invested, the portfolio can start to compound quickly, especially with regular contributions.
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.
Uninterrupted compounding
It’s often said that investing is a marathon, not a sprint. This is true, and it plays into another key strength of the SIPP — investors can’t access money in it until the age of 55 (rising to 57 in 2028).
That has two immediate benefits. One is that it completely removes any temptation to take money out of the portfolio to spend on a new car, holiday, house renovation, dream wedding, emergency, whatever.
By contrast, a Stocks and Shares ISA is an easy-access platform. I can sell my shares at the push of a button, then have the cash sat in my bank account within days. But a SIPP prevents pot-dipping, assuming an investor is under 55. Of course, life does sometimes mean we need ready access to our savings, so the Stocks and Shares ISA has that advantage.
The second thing that’s excellent is its compounding process (interest being earned upon interest). Since I can’t touch the money early, it stays invested for longer. And the longer the compounding period, the bigger the final pot should be.
The first rule of compounding is to never interrupt it unnecessarily.
Charlie Munger
Fostering a long-term mentality
I’ve been investing in my own pension for a few years now. And because I intend to own the shares I have bought for potentially another two decades, my SIPP portfolio experiences far less churn than my ISA.
It also helps when I’ve to be patient with a particular investment. Take Shopify (NYSE: SHOP) for example. I’ve owned shares of the e-commerce enabler in my SIPP for many years.
However, I added to my holding in 2020 at what was (in hindsight) too high a value. In other words, I overpaid for my shares. Less than 18 months later, the stock had crashed 80% due to rising interest rates and my entire holding fell into the red.
It basically stayed that way for two years, as the chart below shows.
Yet during this period, the company continued growing its business and adding merchants to its platform. So instead of selling, I waited patiently for my position to recover (which it did last year) and I’m convinced the long duration nature of the SIPP fostered patience.
Shopify does face a lot of e-commerce competition, which is something I need to keep an eye on. But over 875m consumers — one in every six internet users — bought something from a Shopify merchant’s online store last year. That’s impressive, leaving me keen to remain a long-term shareholder.
This post was originally published on Motley Fool
