The very name of a SIPP can make it seem like an irrelevant concept for some people. After all, it is a Self Invested Personal Pension – and pensions can seem like something for old people.
Except they are not! It is possible to start taking money out of a SIPP as early as 55 (rising to 57 a couple of years from now). Not only that, but a pension has two key phases – putting money in and taking money out.
While taking money out may be something done in later life, putting money in need not wait. Indeed, the earlier the start, the more time there is to try and build a sizeable pension pot for when the time comes to start taking money out.
The right time is now!
So when ought someone start to think seriously about a SIPP? My answer would be: right now!
If they have not already done so, an adult starting a SIPP sooner rather than later can bring substantial benefits for their efforts to build long-term value in their SIPP.
To illustrate this, I will show the projected value at age 65 of a SIPP that someone has put £500 a month into, starting at a given age. In my example I presume a compound annual growth rate of 5%.
Remember, because of the tax relief offered by a SIPP, even though the person contributes £500 a month, that will actually mean £625 hits their SIPP.
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.
| Age when contributions start | Value at age 65 (rounded to nearest £k) |
| 55 | 96 |
| 45 | 254 |
| 35 | 510 |
| 25 | 927 |
| 18 | 1,366 |
Compounding works best over the long term
I find all of those numbers interesting. Even at 55 — an age when some people start to draw down their SIPP — someone could start investing £500 a month and build close to a six-figure SIPP in a decade.
But the most interesting number for me is one that does not appear directly in the chart: £439k. That is the extra amount someone would build in their SIPP by starting at age 18 and not waiting just seven years until they are 25.
Remember – the monthly contribution used is still the same: £500. That amount a month for seven years adds up to £42k. Even allowing for the SIPP tax relief, how does £42k become £429k, a sum over 10 times as great?
The answer: compounding. Starting younger gives money more time to compound. As shown here, the results can be incredible!
One high-yield share to consider
For its income compounding potential, one share I think investors should consider is British American Tobacco (LSE: BATS). It has grown its dividend annually for decades and now yields 5.2% — well above the FTSE 100 average of 3%.
A key question is: can this last? Cigarette sales are declining and revenues have fallen at the company for several years in a row. That is a risk, while some investors may shun the share for ethical reasons.
But British American has been battling weakening demand in some markets and tighter regulatory controls for decades already – yet it keeps pumping out huge free cash flows year after year.
Its portfolio of well-known brands like Rothmans gives it pricing power. I think that could last a long time yet.
Should you invest £5,000 in British American Tobacco P.l.c. right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if British American Tobacco P.l.c. made the list?
Christopher Ruane has no position in any of the companies mentioned.
