Just what would it take to open a Self-Invested Personal Pension (SIPP) today and grow it to a valuation of over £1m in the next 20 years?
The answer depends on the average annual return – and what is put in.
Aiming high, but still grounded in reality
In my example, I presume a compound annual return of 10%. That includes dividends and share price gain, though any share price declines would eat into it.
The FTSE 100 currently yields 3%, though I think it is possible to target a higher level – say, 5% or 6% — while sticking to high-quality shares. Then, to hit the 10% goal, some overall share price growth is needed too.
The FTSE 100 is up 18% over the past year alone and 47% over five years. Over a 20-year period, there could well be both strong performance and weak performances, but carefully choosing a diversified portfolio of high-quality shares, 10% strikes me as a realistic goal.
How much to put in – and why a SIPP not an ISA?
In this example, I presume a monthly contribution of £1,395. For most ordinary rate taxpayers, that is a large amount. The same approach could work with less, but the SIPP valuation after 20 years would be correspondingly lower (and below £1m).
Even at £1,395 a month though, it adds up to an annual contribution below the yearly ISA contribution allowance.
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So why might someone tie their money up in a SIPP (with rules forbidding withdrawals before a specified age, currently 55) and not opt for the more flexible Stocks and Shares ISA vehicle?
A big draw could be the tax relief a SIPP offers. Putting £1,395 into an ISA costs £1,395. Putting £1,395 into a SIPP costs an ordinary rate taxpayer only £1,116 thanks to tax relief. For higher rate and additional rate income tax payers, it costs even less.
One share to consider
I said above that I think a 10% compound annual gain is an achievable (though not easy) goal. One share I have bought for my SIPP in recent months I hope can achieve it is Reckitt Benckiser (LSE: RB).
The Dettol and Finish maker currently offers a dividend yield of 4.3%. It has grown its dividend per share for the past three years in a row. While past performance is not necessarily indicative of what may happen in future, I believe its cash generative business could hopefully support further growth in the shareholder payout.
With a portfolio of premium brands serving ongoing customer needs like household cleaning and its multinational reach, I think Reckitt’s business has good prospects.
I also see room for share price growth, following a 25% fall in the past five years.
The FTSE 100 member has suffered from large writedowns on an ill-fated nutrition acquisition. Historical product liability lawsuits remain a risk and the Middle East conflict could push up ingredient costs, posing a risk to profit margins.
From a long-term perspective though – like the 20 years in my example above – I see this as a durable and attractive business selling at an attractive price.
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Christopher Ruane owns shares in Reckitt Benckiser.
