A SIPP is a Self Invested Personal Pension, and it offers individuals greater control and flexibility over their retirement savings compared to traditional pension plans.
It works in a very similar way to my Stocks and Shares ISA portfolio, with a few exceptions. One is that contributions receive tax relief, with the government adding £20 for every £80 contributed by a basic rate taxpayer. Higher and additional rate taxpayers can claim further tax relief through their tax returns.
So, how can £240 a month turn into a £10m retirement portfolio?
Well, I doubt my own portfolio will ever reach £10m, but my daughter’s might. Many Britons are unaware that they can open a SIPP for their children and the longer the SIPP has to grow, the larger it could become.
Let’s take a closer look.
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.
The process
Opening a SIPP for my daughter was easy. I use the Hargreaves Lansdown platform, where I also have my daughter’s fee-free ISA and my portfolio.
You can pay a maximum of £2,880 per year into this, which becomes £3,600 through 20% tax relief.
So, we simply contribute £240 every month to her SIPP, and this is automatically topped up — with some delay — by the government’s tax relief.
From that point, I pick investments as I would elsewhere in my own portfolio.
Investing right
My daughter’s SIPP is smaller than her ISA and my ISA, and we’re also talking a lot more long term — as it stands, she wouldn’t be able to draw down her SIPP for 56 years.
As such, I’ve been allocating funds towards ETFs, trusts, and funds, whereby we can gain some degree of diversification, but also focus on growth areas of the market.
The first investment I actually made was the FTSE 100‘s Scottish Mortgage Investment Trust (LSE:SMT) — a UK-listed investment trust that invests primarily in growth-focused industries such as information technology and transportation.
Over the last 10 years, the stock has returned approximately 14.35% per year.
So, let’s assume I target and achieve 10% annualised growth for my daughter’s SIPP. How could it grow?
Source: thecalculatorsite.com
As the graph shows, the SIPP would see phenomenal growth as it compounds, reaching above £10m in the 57th year. This really highlights the power of compounding and the value of starting early.
Why Scottish Mortgage?
So, why was my first investment Scottish Mortgage? While shares in the trust have fallen by around 40% in the last couple of years, the long-term trajectory remains impressive.
The fund’s share price reflects the value of the companies in which it invests. The majority of its holdings are publicly listed like ASML and Nvidia, but some are unlisted like Space Exploration Technologies (SpaceX).
Interestingly, SpaceX is now its third-largest holding. Personally, I like the exposure to a company I wouldn’t normally be able to invest in, but it’s worth bearing in mind that SpaceX’s valuation is not determined by the market.
Likewise, from a risk perspective, we need to recognise that growth-focused businesses can fail, and when they do, the trust’s stock falls.
However, the team at Scottish Mortgage has an excellent record of picking the next big winners. That’s why I’m backing it to succeed over the long run.
The post I’d invest £240 a month in a SIPP and aim for £10m at retirement! appeared first on The Motley Fool UK.
5 stocks for trying to build wealth after 50
Inflation recently hit 40-year highs… the ‘cost of living crisis’ rumbles on… the prospect of a new Cold War with Russia and China looms large, while the global economy could be teetering on the brink of recession.
Whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times. Yet despite the stock market’s recent gains, we think many shares still trade at a discount to their true value.
Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…
We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.
Claim your free copy now
More reading
Here’s how I’d invest £200 a month and aim for £63,200 of annual passive income
This FTSE 100 stock looks like a certified bargain to me!
2 superb growth shares just snapped up by Scottish Mortgage
£20,000 in savings? Here’s how I’d aim to turn that into an £83,247 annual second income
I think these FTSE investment trusts will soar in the next bull market
James Fox has positions in Nvidia, and Scottish Mortgage Investment Trust Plc. The Motley Fool UK has recommended ASML and Nvidia. 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.
