There has been uncertainty in recent years about what will happen to ISA allowances. Some investors have been eyeing other potential investment vehicles for their money, including Self-Invested Personal Pensions (SIPPs).
Sometimes though, there may seem to be no rush even to consider a SIPP. Retirement can seem a long way off for many of us and pensions often never seem to have much urgency.
But a SIPP can offer an investor benefits – and those can be more substantial over the course of time.
SIPPs have a significant advantage compared to ISAs
There are some things I like about my Stocks and Shares ISA over my SIPP. For example, unlike a SIPP, before reaching 55, I can take money out at any time.
Also any capital gains and income inside the ISA are tax-free, whereas a SIPP is more complicated. There is a tax-free drawdown allowance from 55 onwards, but apart from that the contents could be subject to tax.
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.
So, why do I bother with a SIPP? One big advantage is tax relief.
In layman’s terms, that means that for every £80 an ordinary rate income tax payer puts into their SIPP, the Exchequer gives them another £20. So they will then have £100 to invest.
For higher and additional rate income tax payers, the financial benefits can be even greater, thanks to more generous levels of tax relief.
Twenty pounds in my example might not sound like much. But that could instead be, for example, a free £20k on an £80k investment. That is enough to get many investors to sit up and pay attention!
Compounding’s a powerful wealth-building technique
We do not know how long that tax benefit may last. Apart from that though, what is the rush? In short, taking a long-term approach to investing allows money more time to grow – something it may do, thanks to the power of compounding.
Say someone invests £80k in a SIPP today which, thanks to tax relief, will be rounded up to £100k. By compounding that at 5% for 15 years, they could more than double their SIPP value to almost £208k.
But if they did that for just 10 years longer, the SIPP ought to be worth far more: some £338k. Adding more years of investing once retired is tough. So it is easier to aim for the same effect, by starting the SIPP investment much sooner!
One potential income and growth opportunity
One share I think SIPP investors should consider for its long-term prospects is consumer goods firm Reckitt Benckiser (LSE: RKT). The 4.6% dividend yield is already attractive, as it sits well above the FTSE 100 average.
But I also believe the Reckitt share price has long-term growth potential given that it currently trades on a lowly 10 times earnings.
Why is Reckitt priced like that? It has had legal problems around product liability in recent years and they may continue. The Middle East conflict threatens to add ingredient inflation and costlier shipping rates to the company’s woes, eating into profit margins.
As a long-term investor though, I feel chipper about Reckitt’s future potential. Its stable of long-established brands such as Dettol and Harpic give it pricing power. Hopefully, that will help it keep making sizeable profits.
