Investors are waking up to the value of investing in a Self-Invested Personal Pension, or SIPP. While Stocks and Shares ISAs are better known, SIPPs boast serious tax advantages too. The two complement each other very nicely.
While all income and growth in an ISA can be taken free of tax, SIPP tax benefits kick in right at the start. Investors can claim upfront tax relief on contributions, at either 20%, 40% or 45%.
If you’re a 20% taxpayer, each £100 that goes into your SIPP only costs you £80 after basic rate tax relief. A higher-rate 40% taxpayer can claim a further 20% through their tax return, so that £100 costs them just £60. All future growth builds from that higher base.
Check out the growth rates
While SIPP withdrawals may be subject to income tax, you can take 25% as tax-free cash. The two wrappers allow you to manage withdrawals in a way that minimises your income tax bill in retirement.
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.
Let’s say a 50-year-old investor has £100,000 in their SIPP and is wondering how much it’ll be worth at 65. The answer depend on how well their portfolio grows, and of course nobody knows that.
But I find this figure valuable. Over the last decade, the average Stocks and Shares ISA has grown at an annual rate of 9.64%, with dividends reinvested. I think we can fairly apply that to the SIPP, which allows investors to buy the same stocks and funds.
Over 15 years, that rate of growth would turn £100k into £259,235. That’s good, but I’m not sure it’s enough to provide a comfortable retirement on its own.
Let’s say our investor also tucks away £300 a month. That will cost a 40% taxpayer just £180 after tax relief. That could turn their £100k into £320,134. Ideally, they should pay in more if they can.
A popular way to build wealth is to invest in a spread of FTSE 100 and FTSE 250 stocks, which offer both share price growth and dividend income potential.
Here’s why I like Standard Life shares
One stock that’s done well in my SIPP is insurer Standard Life (LSE: SDLF), until recently known as Phoenix Group. It offers a terrific trailing yield of 6.1%. The share price is up 39.7% in the last year, which lifts the total return past 45%. Profits have surged in its pensions and savings business, while the planned acquisition of Aegon UK’s pensions business offers a new growth opportunity.
Standard Life boasts a strong balance sheet and capital position, making the dividend look reasonably secure. Shareholder payouts are expected to rise by 2% a year over the next few years.
As with every stock, there are risks. Its Aegon UK purchase may not generate the anticipated savings and synergies, while the pension and retirement market is highly competitive. A stock market crash could hit the assets Standard Life holds to fund its liabilities.
The shares may slow at some point but Standard Life looks reasonable value with a price-to-earnings ratio of 16.8. I think it’s well worth considering today, whether in an ISA or SIPP.
Should you invest £5,000 in Standard Life 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 Standard Life made the list?
Harvey Jones owns shares in Standard Life.
