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Building a Self-Invested Personal Pension (SIPP) or ISA worth a mighty million pounds may sound like a fantastical dream, but it’s far from impossible.
I’m not selling snake oil here. To build a seven-figure retirement pot takes time, patience and bags of discipline, but can be done if investors start early and stick with it.
The longer an investor has, the better their chances. Relatively modest sums can compound and grow over time, free of tax inside their SIPP. So there’s no time to lose.
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.
FTSE 100 pension pot
I’ve done some really basic number-crunching to show how wealth can build over a 30-year period. Let’s say our investor starts from scratch at 35. We’ll also assume they generate the average long-term total return on the FTSE 100, which is around 8% a year, with all dividends reinvested.
If they invested £700 a month, their SIPP should be worth £1,027,706 by age 65. Obviously, this isn’t guaranteed. It could be more, could be less. And I accept the £700 is a lot to find aged 35.
However, SIPP contributions attract tax relief at 20%, 40% of 45%, which speeds up the process. A 40% taxpayer only has to pay in £420 a month. Tax relief will top that up to £700.
But what if the investor isn’t starting from scratch? Let’s say they have £100,000 in their SIPP on day one, after transferring over some legacy personal and company pensions (something I’ve done).
To turn that £100k into £1m by age 65, here’s how much they would have to invest every month. Nothing! I was surprised too. Growth of 8% a year would do the job in 30 years, but we have to remember that 8% isn’t guaranteed. No contributions required – although I would suggest making them anyway. The more the merrier.
Let’s say they have £50,000. To hit a million over 30 years, they’d need to invest £350 a month on top. After tax relief, that’s just £210 for a 40% taxpayer.
Aviva offers income and growth
With no time to lose, investors may want to buy some FTSE 100 stocks pretty quickly. Insurer Aviva (LSE: AV) could be a good portfolio building block to research further.
The shares have had a stellar run, up 36% in a year, and 132% over five years. Today, they have a trailing dividend income of 5.5%. Reinvested, they will have turbo-charged those growth figures.
CEO Amanda Blanc’s shaken up Aviva since her appointment in 2020. Before she sharpened its focus, the shares had idled for years. It’s now one of the most impressive dividend growth shares on the FTSE 100 and has a new growth opportunity, following its £3.7bn takeover of motor insurer Direct Line.
Stocks and shares have risks
No share climbs in a straight line forever. After a strong run, the shares look expensive, with a price-to-earnings ratio of 27.5. That’s almost double the FTSE 100 long-term average of around 15. A bout of stock market volatility could knock the value of assets under management, and squeeze profits.
I’d suggest building a balanced portfolio of around 15 different FTSE shares across dividend sectors, to mitigate risks like these. With a long-term view, a million-pound SIPP or ISA is possible, but never guaranteed.
