When my daughter was born, one of the first things I did was open a SIPP (Self-Invested Personal Pension) in her name. It may sound premature – after all, retirement is at least 55 years away from a newborn.
But that’s the reason for doing it. Time is the most powerful ingredient in wealth creation, and a SIPP opened at birth has more than any other investment vehicle.
Here’s some pretty simple math. If I contribute just £240 a month to a Small SIPP – that’s the equivalent of £55 a week – the government automatically adds 20% tax relief, bringing the total contribution to £300 a month, or £3,600 a year. That is the current average annual allowance for a non-income earner.
At an average annual growth rate of 10%, compounded monthly over 55 years, that £300 a month snowballs to around £8.6m. Total amount donated? Just £198,000.
The rest – more than £8.3m – is generated by compound growth. It’s the closest thing to financial magic there is.
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It’s very achievable
Now, 10% may sound ambitious, but it is broadly in line with the long-term average return of the stock market. I S&P 500for example, it has returned about 10%-11% per year over the past century. Of course, past performance does not guarantee future results, and there will be bumps along the way. But over 55 years, history suggests that the odds are in your favor.
And this is where you get the real fun. Those figures assume that parents or grandparents bear all costs for age 55. In fact, at some point the child grows up, gets a job, and can start giving on his own. If they start adding to the pot from the age of 21, the numbers become truly amazing.
| Condition (10% growth) | 55 value | Amount contributed |
|---|---|---|
| Parents only: £300/m for 55 years | £8,574,424 | £198,000 |
| A child adds £500/m (inflation-adj) from 21 | £14,853,736 | £402,000 |
| A child adds £1,000/m (inflation-adj) from 21 | £21,133,048 | £606,000 |
Where can you plant?
This is the million dollar question. However, here are some things to consider. The portfolio will start slow, so it may be better to make fewer trades (limit transaction costs). That might mean picking up one portion of a fund or trust that provides instant diversification across companies.
One prospect that continues to attract my attention Scottish Mortgage Investment Trust (LSE:SMT). The investment trust has a good track record of picking big winners, and hopefully it will be able to navigate some of the AI turmoil ahead. Scottish Mortgage has positions in the likes of TSMC, The Mercadolibre, ASMLagain Nvidia. These are the technology leaders, and three of the four have done very well in the past year.
But the largest number is held by SpaceX. And I love that. If I had to guess at what I think will be the biggest company in the world ten years from now, I would say SpaceX. I could be very wrong, but I think there is a very compelling argument to believe that SpaceX will dominate the space economy.
The risks? However, Scottish Mortgage uses gear – lending to invest. This can increase profits when stocks go up, but increase losses when the investment goes down.
However, this could be an excellent long-term vehicle for the passive investor. I think it’s worth considering.
