How do I build a million-pound SIPP?

A million-pound SIPP (Self-Invested Personal Pension) might seem like a distant fantasy. However, building one is actually more achievable than we might think.

Here, I’m going to reveal how, with the right strategy, literally anyone can build a seven-figure pension pot. Let’s dive in.

Regular contributions

The way I see it, there are two essential things someone must do if they want to achieve a £1m SIPP.

The first thing is make regular contributions into their account. Over time, even small contributions can add up.

It’s worth noting that when someone makes a contribution to their SIPP, they usually receive tax relief (a bonus from the government for saving for retirement).

This is 20% for basic-rate taxpayers, 40% for higher-rate taxpayers, and 45% for additional-rate taxpayers.

This tax relief can make a big difference to a balance. For example, invest £10,000 as a basic-rate taxpayer and the government will add in another £2,500, taking the total contribution to £12,500.

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.

A sound investing strategy

The other thing an investor needs to do is put a sound investment strategy in place in order to take advantage of the power of compounding (or earning a return on previous returns). When money is compounded over time, it grows much faster.

Now, there are many different investment strategies that can be pursued within a SIPP.

One simple strategy is to just invest in a low-cost global tracker fund such as the Vanguard FTSE All-World UCITS ETF (LSE: VWRP).

This is a broad global equity fund that provides exposure to large and medium-sized companies in developed countries and emerging markets. In total, it has exposure to around 3,700 stocks.

Since its inception in July 2019, this ETF has returned about 60%, which is a great return in a little under five years.

Past performance is not an indicator of future returns, of course. If global stock markets were to experience weakness due to a slowdown in economic growth, heightened geopolitical tension, or an unexpected ‘black swan’ event, this ETF could underperform.

However, history shows that with a global tracker fund like this, someone could expect to achieve returns of around 8%-10% per year over the long run.

An alternative is to pick a selection of individual stocks in the hope of achieving higher returns than this. This is a riskier approach. However, pick the right stocks, and an investor could potentially get to the £1m mark sooner.

Just a look at the long-term gains delivered by semiconductor company Nvidia. Had I invested £2,000 in the company 10 years ago, I’d now have about £500,000.

Of course, these approaches are not mutually exclusive. And personally, I like the idea of doing both.

By allocating the bulk of my SIPP savings to broad tracker funds, but putting some money into high-quality individual stocks, I could potentially generate strong market-beating returns while keeping my risk levels down.

How long to £1m?

How long would it take me to build up a £1m SIPP using this approach?

Well, it would depend on the contributions made and the returns achieved.

However, I calculate that if a basic-rate taxpayer was to put £10k a year into their SIPP (£12.5k after tax relief) and they made a 10% return over the long term, they’d hit the magical £1m mark in just 23 years.

The post How do I build a million-pound SIPP? appeared first on The Motley Fool UK.

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Edward Sheldon has positions in Nvidia. The Motley Fool UK has recommended 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.