The Self-Invested Personal Pension (SIPP) is a marvellous financial tool for investors building wealth for retirement. The numerous tax benefits combined with a pound-cost-averaging strategy can lead to spectacular results. In fact, drip feeding just £500 a month could be all that’s needed to push a pension pot over the £1,000,000 threshold. Here’s how.
Building that fund
SIPPs come with several restrictions. The most prominent of which is that investors can’t access their wealth until turning 55. And this barrier is being lifted to 57 in 2028, with further hikes likely in the future. However, for investors specially aiming to build a sizable pension pot, that’s hardly a dealbreaker, especially considering the benefits.
Any money injected into a SIPP is eligible for tax relief. In other words, any income tax paid on capital is refunded and made available for investments. For example, let’s say an investor is in the 20% UK tax bracket. By depositing £500 into a SIPP, they’d receive an extra £125 as a tax refund, resulting in a total capital of £625. And that’s more than enough to reach £1m in the long run.
Let’s assume the FTSE 100 continues to deliver its 8% average total return for the foreseeable future. Starting from scratch, investing £625 each month at this rate of return would build a seven-figure pension pot within 31 years. And considering the average career lasts 37 years, starting sooner rather than later could pave the way to an earlier retirement.
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.
Even more wealth?
Obviously, waiting around for three decades isn’t the most exciting process in the world. And sadly, the age withdrawal restrictions of a SIPP put a limit on how much quicker an investor can access their wealth. However, there’s nothing stopping them from building up an even larger pension pot to enjoy at the age of 57.
This is where stock picking enters the equation. Instead of throwing money into a passive index fund, investors can target specific businesses to strive for chunkier returns. And one British company from my portfolio that I believe has market-beating capabilities is Alpha Group International (LSE:ALPH).
The fintech group provides currency risk management as well as alternative banking solutions to small- and medium-sized businesses. While it’s not short on competition, management has sucessfully carved out a lucrative niche that’s translated into chunky cash flows growing at a rapid pace. With that in mind, it’s not surprising the share price has averaged a 21.9% annual return over the last five years!
Even if the company beats all the odds and becomes an industry leader (which is a big “if”), sustaining a nearly 22% annual return will be exceptionally difficult. However, even if it only delivers half of its historical average, that’s enough to send a SIPP higher by another £750,000 to £1.75m!
This post was originally published on Motley Fool
