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The idea of a Self-Invested Personal Pension (SIPP) easing the financial burden of later life can be appealing.
But it can also sometimes be daunting for someone who has not made a start yet. Even fairly late in working life – say, in your fifties – there can be enough time left to build a decent-sized SIPP before retirement.
From zero to £300k
Different investors will have different targets for how big a SIPP they want. In this example, I will use £300k. And how long it takes to get to that amount depends on what someone puts in and the compound annual growth rate.
That consists of any capital gains and dividends, though capital losses could eat into it. Dividends are never guaranteed to last. So a good SIPP should be diversified and smart investors look carefully at what shares they plan to buy before actually purchasing them.
To start backwards, say someone wants to build a £300k SIPP in 15 years. Presume they can achieve a 5% compound annual growth rate, it may be possible to do better, but I think 5% is a realistic goal even while sticking to well-known, large, blue-chip shares.
That would require a monthly contribution of £1,133.
A SIPP offers tax relief
But here is where things get interesting with a SIPP as opposed to, say, a Stocks and Shares ISA. Tax relief means that to invest £1,133 a month, the investor does not actually need to put that much into the SIPP. They can put in just over £906 a month and tax relief will top that up to the desired £1,133.
In fact, for higher and additional rate taxpayers, things are even better, as a higher level of tax relief means they could put in less than that to get that £1,133.
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.
Here’s a share to consider
And as I said above, I think 5% is a realistic compound annual growth target. One share I think investors should consider in the current market is FTSE 100 consumer goods company Reckitt Benckiser (LSE: RKT).
Its yield is 4.1% and I think the dividend looks set to keep growing, with the latest increase announced last week.
The share price performance over recent years has not been so impressive, as it has fallen 8% over the past five years. But decent results last week gave it a fillip. At 11 times earnings, I continue to see the share as underpriced.
After all, Reckitt is an established business with a global distribution network. Its premium brands such as Finish give it pricing power.
I also like the company’s focus on product categories where consumer demand tends to be resilient even during economically challenging times, such as household cleaners.
The company’s nutrition division has long been a source of problems but even this reported revenue growth in the first half of the year. There is still a risk it could struggle again in future given Reckitt’s limited focus on it, while inflation could eat into profit margins across the whole portfolio.
From a long-term perspective though, I like the business and its prospects. Indeed, I currently hold this share in my own SIPP.
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Christopher Ruane owns shares in Reckitt Benckiser.
This story originally appeared on Motley Fool
