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What kind of objective does a person really have when they invest in a Personal Investment Pension (SIPP)?
The answer can vary greatly, depending on several variables. Let’s take them in turn.
A timeline
Time can work in the investor’s favor.
It allows them to combine benefits.
It also means that someone who invests in what they think is a business with great unrealized potential (or an already brilliant one that has been overlooked) can sit around waiting for years or decades in the hope that the market will recognize it.
Contributions
Over time, how much a person puts into their SIPP will be an important factor in determining what will ultimately be beneficial.
That could be a lump sum, regular donations along the way, or both.
Over time, regular contributions can be combined. Ten years of monthly contributions of £500 will add up to £60k.
Combining that can make it more.
By contributing £500 a month and compounding it at 5% per annum, the SIPP should be worth more than £77k after ten years. After 20 years, it could be more than £205k. After 40 years (which I think is a realistic contribution time for most SIPP investors, depending on their age), it should be worth £763k.
That’s before considering the potential tax benefits of investing through a SIPP.
For example, that £500 monthly contribution ‘added’ by the government by 20% to £600 per month and compounded at 5% per annum for 40 years would cost £.916k. For high-income taxpayers, the benefit can be even greater.
Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
Building wealth – and destroying it
Is 5% a realistic compound annual growth rate?
To answer that, think about what can help money grow – and what can eat into it.
An obvious factor that eats away would be fees and commissions, especially in the long run. It is therefore important to choose carefully when choosing a SIPP provider.
Another thing that can make the price go down is that share prices go down. On the contrary, the growth of the stock price may increase it. Benefits can also help. Over the decades, the returns are very large in some SIPPs depending on how it is invested.
Either way, choosing a diverse portfolio of high-quality companies purchased at attractive prices is important.
In doing so, I think someone would not only aim for a 5% annual compound growth rate, they would aim more realistically.
Laser focused on quality, long term
One stock that I think investors should consider FTSE 100 property manager IM&G (LSE: MNG).
It yields 6.7%. The company also aims to increase its dividend each year, although dividends are never guaranteed.
The yield was actually higher because the share price growth outpaced the dividend growth, but it is still large.
M&G’s share price has risen 54% over the past five years.
Inventory management is a major industry that is set to benefit from continued high demand in the coming decades.
With millions of customers, a well-established reputation, and a strong brand, I believe M&G has competitive advantages that can help it do well.
Another risk is turbulent markets that lead policyholders to withdraw funds, hurting profits. If M&G’s asset managers do well enough, though, I think the risk should be manageable.
