A SIPP (Self-Invested Personal Pension) is a DIY pension that gives you complete control over how your money is invested. And because the government provides tax relief, the wealth-building process can be turbocharged.
Here, I want to look at how much £25,000 could become by 2055, which gives a nice time span to let compounding do its thing (just under three decades). Let’s dive in.
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.
Mushrooming returns
For simplicity’s sake, I’m going to assume that the £25k sum is after the government top-up. This removes the variations associated with SIPP tax relief, as well as making the power of compound interest more explicit.
Now, the first thing to point out is that stock market returns are highly unpredictable, especially when we’re looking out years into the future. Investing a lump sum during a frothy market top can result in sub-par performance, and vice versa.
The problem is that nobody can reliably call a market top, nor a bottom. Bull runs tend to rage for years, while bear markets can keep heading lower and lower.
Again, to keep things simple, I’m going to assume an average annualised market return of 9%, including all dividends reinvested along the way. This is broadly what a global index fund has delivered historically.
Here’s how this scenario would play out over various time frames:
| Years | |
|---|---|
| 5 | £38,000* |
| 10 | £59,000 |
| 15 | £91,000 |
| 20 | £140,000 |
| 25 | £216,000 |
| 29 | £304,000 |
As we can see, the £25k becomes roughly £304k within three decades — with almost a third coming in the final four years. That’s the snowballing effect of compounding!
Admittedly, I haven’t included any fees here, which are real and would shave some off the total (how much would depend on which investment platform ones uses).
Even so, the end result would clearly still be worth it.
How to aim for 9%?
The obvious question now is, how to go about securing this 9% return? Well, there are broadly three approaches one could consider taking in the stock market.
- Passive index investing (eg, a low-cost global index tracker)
- Active investing (picking stocks, investment trusts, and funds)
- A mixture of the two
Of course, it’s for each individual to choose which investing strategy they pursue (all have the potential to produce solid returns).
But as far as stocks are concerned, I think LondonMetric Property (LSE:LMP) is worth considering today as part of a diversified portfolio. This FTSE 100 REIT (real estate investment trust) specialises in logistics, convenience retail, healthcare, and entertainment and leisure properties.
There are a number of things I like here. For a start, there’s a good mix of sectors, offering both stability (blue-chip tenants like Marks and Spencer and Premier Inn) and growth (e-commerce trends). The REIT’s occupancy rate is 98%.
Another attractive factor is that 69% of the rent has contractual uplifts in place, baking in guaranteed growth. And this should support dividend payments moving forward.
What could go wrong? Well, REITS are highly sensitive to sudden interest rate movements. Were inflation to prove stickier than we all hope, LondonMetric stock (and dividend growth) could disappoint.
However, with a substantial 6.7% starting dividend yield currently on offer, the rewards outweigh the risks for me. I own shares in my own portfolio.
Should you invest £5,000 in LondonMetric Property Plc right now?
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Ben McPoland owns shares in LondonMetric Property.
This story originally appeared on Motley Fool
