Nobody wants a stock market crash, but if one came, it could be a boon for anyone holding a Self-Invested Personal Pension (SIPP) for retirement. That probably sounds strange at first – watching a retirement pot fall is painful, surely? Nobody enjoys seeing years of contributions shrink on a screen.
Yet the initial damage isn’t the whole story. For investors still decades from retirement, a crash could create an opportunity to buy more shares in quality businesses at lower prices.
Why falling prices can help
The biggest risk isn’t volatility. It’s behaviour. When markets rise, investors often feel clever and contribute more. When they fall, many freeze or sell near the bottom. That turns a temporary price decline into a permanent loss of future ownership.
The recent backdrop shows how quickly sentiment can change. The FTSE 100 slipped 1.8% after UK inflation came in above expectations.
I’m not trying to predict a crash, simply stating that a plan can’t rely on markets always doing well. Record highs aren’t always a reason to celebrate. They also warrant caution.
Here’s the simple maths. Suppose you put £500 into a SIPP every month. At high prices, that £500 buys fewer shares. After a 20% fall, the same £500 buys more. When (if) those assets recover, you now own more of them.
The SIPP compounds this even further. Basic-rate taxpayers receive 20% tax relief on eligible contributions, effectively a government top-up.
So anything invested during a downturn isn’t just cheaper – it’s also receiving a tax boost. That’s why savvy investors don’t panic in a crash, they use it to optimise their long-term returns.
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.
Investec shows the idea
Take Investec (LSE:INVP), for example. It exhibits long-term qualities worth considering for a SIPP, and it’s already looking like a bargain.
The bank and wealth manager closed at 600p on 21 October, roughly 13% below its 52-week high of 690p set in June. That pullback reflects the risks it faces as a UK bank, such as interest-rate uncertainty and concerns about the economy.
But the falling price is only a part of the story. Its latest full-year results showed total dividends of 38.5p per share for the year ended 31 March, up from 36.5p the year before. The final dividend was 21p, paid on 15 September.
That puts the trailing dividend yield at an attractive 6.15% – notably higher than most major banks. It’s well-covered too, which is critical – a high yield means little if earnings can’t support it.
Plus, it doesn’t look overbought. The average broker target is around 770p – roughly 30% higher than the current price. Of course, analyst forecasts don’t guarantee anything but they indicate sentiment. Credit losses, weak markets or regulatory pressure could easily derail those forecasts.
Importantly, a lower price doesn’t automatically make a stock a bargain. It can however, turn a good quality income stock into an even more compelling long-term SIPP holding.
The real test
A crash would test anyone’s nerves. But the investors who tend to benefit aren’t the ones who predict crashes. They’re the ones who keep contributing, stick to a diversified plan, and avoid selling quality assets in a panic.
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Mark Hartley does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
