Combining the power of pound-cost averaging with the tax relief benefits of a Self-Invested Personal Pension (SIPP) can drastically accelerate the wealth-building process. That’s especially true in the current market climate, with so many top-notch stocks trading at a discount. And intelligently drip-feeding £450 each month into winning investments could propel a pension pot into millionaire territory. Here’s how.
Aiming for a million
Using a SIPP to invest comes with a lot of caveats. Most notably, once money has been injected, it can’t be withdrawn until reaching the age of 55. As of 2028, this threshold is set to increase to 57. And it could be a lot higher in the future.
However, any money that does get put in provides a nice lump of tax relief equal to the tax rate paid by the investor. So if an investor is on the basic tax rate of 20%, each £450 lump sum gets topped up to £540, resulting in more capital to invest with. Over the course of a year, that’s the difference between £5,400 and £6,480.
So how long would it take to turn these monthly contributions into a million pounds? Historically, the FTSE 100 has delivered returns of around 8% a year, including dividends. And if an investor were to replicate this through an index fund, the journey to millionaire territory could be finished within 33 years.
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.
Shortening the waiting time
That’s a nice way to secure a more luxurious retirement. But waiting just over three decades is less than ideal. Even more so since a poorly-timed crash or correction could make investors wait far longer.
Fortunately, this timeline can be accelerated. The easiest way is to simply inject more money. Even an extra £100 (plus £20 from tax relief) each month can cut two years off the waiting time. But money put into investments should only be sourced from excess earnings.
After all, investors financially overextending themselves could end up in a heap of trouble, especially since money put into a SIPP can’t be accessed again until after passing the minimum age requirement.
So instead, investors should strive to increase the annual return through stock picking.
Generating market-beating returns
One of the biggest advantages of index investing is that it provides a near-hands-free investing journey with very low knowledge requirements. Stock picking isn’t as forgiving and demands far more attention and dedication.
Like any house, a portfolio that’s badly built and poorly maintained will most likely crumble into rubble, destroying wealth rather than making more of it. Learning to pick stocks doesn’t happen overnight. And even if an investor becomes a master investor, promising well-researched investments can still fall short of expectations.
The last few years serve as a perfect example of external disruptions throwing a spanner into the works of even the most prominent businesses today. That’s why diversification is paramount.
By spreading capital across multiple top-notch stocks, the impact of one failing can be mitigated by the success of others. And since capital is being drip-fed each month, a portfolio automatically gains the benefits of pound-cost averaging. Should a portfolio position suddenly take a nose dive due to short-term challenges, investors will have more capital at hand to snap up more shares at a discount.
The post How to try and turn £450 a month into £1m using a SIPP appeared first on The Motley Fool UK.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
Get your free passive income stock pick
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
What do low PEG ratios tell us about these FTSE 100 shares?
These FTSE 100 banks appear massively undervalued! Are they?
I’d copy Warren Buffett’s tactics and start buying cheap growth stocks
Buy-to-let is dying! Here’s how I’d earn a second income with £10k
How cheap is the Lloyds share price?
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.
