The first Self-Invested Personal Pension (SIPP) was introduced in March 1990 to try and encourage more individuals to take responsibility for their retirement planning. Thirty-six years later, the Pensions Commission has warned that 15m Britons are still not saving adequately for their retirement.
However, it’s never too late to make amends. Indeed, I believe it’s possible for someone aged 50 to still aim for a SIPP worth a cool quarter of a million. Let me explain.
Taking advantage
The great thing about a SIPP is that contributions up to a certain level attract tax relief. The precise figure depends on personal circumstances but, for most people, it’s likely to be a large number.
Another attraction of a SIPP is its flexibility. All types of investments can be held. Here, I’m going to focus on stocks and shares.
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.
Getting started
To begin, we need to decide on an appropriate age at which to retire. Given that today’s 50-year-olds are likely to receive the State Pension when they’re 67, this seems like a reasonable starting point. This gives an investment horizon of 17 years.
With an annual return of 8%, it means monthly contributions of £592 (including tax relief) would be needed to get to £250,000. Admittedly, this is a chunky number.
That’s why it’s better to start earlier. Deep down, we all know this. But as evidence, investing £54 for 45 years at 8%, would grow to £250,456 after 17 years.
So is 8% achievable? By picking the right stocks, I think it is.
What does recent history show?
Looking back five years to June 2021, there are 39 stocks on the FTSE 100 that have returned more than this. On the FTSE 250, there are 54. In other words, over a quarter of the UK’s largest 350 listed companies have met our target. If dividends were included, the number would be even higher.
Of course, there are no guarantees that history will be repeated. But in the absence of a crystal ball, it’s all we have to go on.
A popular choice
Among AJ Bell’s clients, Scottish Mortgage Investment Trust (LSE:SMT) is one of the most popular stocks to hold in a SIPP. Why? Well, I suspect many like the trust’s philosophy of only investing in “the world’s most exceptional public and private growth companies”.
However, there are risks. Tech stocks can be volatile. Indeed, the trust’s share price has risen by an average of less than 5% a year since June 2021. And its net asset value has under-performed when measured against the trust’s chosen benchmark.
Another potential issue is that a large proportion of its investments (41.5%) are in unquoted companies, which can be difficult to value. Having said that, it could see a large paper gain — possibly up to £1.75bn — if the SpaceX IPO goes as many are predicting.
On the plus side, taking a position in the trust means risk is spread across 102 companies. And it will only take a handful of these to benefit from the anticipated AI revolution for it to be a huge winner.
That’s why I think Scottish Mortgage Investment Trust is a quality UK stock that could be considered for a SIPP. What’s more, there are loads of others to choose from as well.
Should you invest £5,000 in Scottish Mortgage Investment Trust Plc right now?
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James Beard owns shares in Scottish Mortgage Investment Trust plc.
