Lots of people leave financial planning for retirement late, denying themselves opportunities to benefit from long-term compounding. Some people only start to think about a Self-Invested Personal Pension (SIPP) in their thirties or forties – early enough to set one up and build wealth in it, but still quite late.
Someone who starts a SIPP at 20 has a big head start on someone else in the same position who begins their SIPP at 40.
In your forties with no SIPP, is all lost? Fortunately, the answer is no! A 40-year-old could aim to build a SIPP worth well over £1m by the time they hit 67, the State Pension age that will come into effect over the next several years.
Here’s how.
Starting with serious intent
So 40 is not too late to start, but for a serious goal some serious effort will be involved as the clock is ticking. Let us say someone puts £1,000 a month into their SIPP. That will be made up to £1,250 a month thanks to tax relief. Compounding that at 7% annually, the SIPP will be worth over £1,153,000 by the time the investor hits 67.
The tax relief if as it sounds – basically a top up from the Exchequer (higher and additional rate income taxpayers will get even more than in this example).
That is a big benefit of using the SIPP structure compared to, say, a Stocks and Shares ISA. But there are constraints too, including no withdrawals before 55 and only limited tax-exempt allowance on withdrawals.
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.
Slow and steady wins the race
I talked above about the clock ticking. But even starting at 40 still allows a 27-year timeframe for contributions to pile up and gains to compound. A long timeframe can be helpful as it can allow space for good periods in the market as well as bad ones, and hopefully gains can add up.
That does not mean the 7% compound annual gain target I mentioned above will necessarily be easy to hit. But I do see it as realistic.
What matters is that the investor diversifies the SIPP across a carefully selected range of high-quality businesses, taking care not to overpay for the share.
A growth and income opportunity
An example of how I try and put that into practice in my own SIPP is my shareholding in Greggs (LSE: GRG). The Greggs share price has fallen 35% over the past five years, but the business continues to grow and, to me, currently looks attractively priced for its long-term prospects.
The yield is 4.1%: not earth-shattering, but above average for a FTSE 250 company and, again, attractive to me.
I like the simplicity of Greggs’ proven business model. With several thousand shops, it has economies of scale no rival baker can match. It also benefits from resilient demand for affordable food.
But there are risks. High energy costs could eat into profits and a large workforce means that higher National Insurance and wage costs remain a risk.
From a long-term perspective though, I reckon Greggs is an excellent business and the share remains attractively priced.
Should you invest £5,000 in Greggs Plc right now?
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Christopher Ruane does not hold any positions in the companies mentioned.
