What can a person realistically achieve by contributing to a Self-Invested Personal Pension (SIPP)?

The answer can vary greatly, depending on several variables. Let’s take them one by one.

Timeline

Time may be on the investor’s side.

This allows them to pool profits.

It also means that someone investing in a business that they think has brilliant, unrealized potential (or is already brilliant but is undervalued) can sit and wait for years or decades in the hope that the market will recognize it.

Contributions

Apart from time, a key element in determining how much it will ultimately be worth will be how much someone puts into their SIPP.

This may be in the form of a lump sum, regular ongoing contributions, or both.

Regular premiums can add up in the long run. Ten-year contributions of £500 a month will amount to £60,000. pounds.

A combination that can make it even more.

By contributing £500 a month and increasing it by 5% a year, your SIPP should be worth over £77,000 after ten years. pounds. After 20 years, it may be worth over PLN 205,000. pounds. After 40 years (which I think is a realistic contribution period for many SIPP investors, depending on their age) it should be worth around £763 thousand.

This is before you even consider the potential tax benefits of investing through a SIPP.

For example, this monthly contribution of £500 ‘topped up’ by the government by 20% to £600 a month and compounded by 5% a year over 40 years would be worth close to £916 thousand. For higher rate taxpayers, the benefit may be even greater.

Please note that tax treatment depends on each client’s individual situation and may change in the future. The content of this article is for informational purposes only. It is not intended to be and does not constitute any form of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.

Building wealth – and destroying it

Is 5% a realistic compound annual growth rate?

To answer this question, consider what can lend a hand you grow your money and what can eat away at it.

An obvious contributing factor may be fees and commissions, especially in the long term. It is therefore essential to choose your SIPP provider carefully.

Another factor that may cause a decline in value is a decline in share prices. On the other hand, an escalate in share prices could escalate it. Dividends can also be helpful. Over the decades, dividends have been very high for some SIPPs, depending on how they are invested.

Regardless of the approach, it is essential to select a diversified portfolio of high-quality companies purchased at attractive prices.

By doing this, I think you can not only aim for a compound annual growth rate of 5%, but you can realistically target a higher growth rate.

The laser focuses on quality in the long run

One stock I think investors should consider is FTSE100 asset manager M&G (LSE:MNG).

This gives 6.7%. The company also aims to escalate its dividend per share annually, although dividends are never guaranteed.

Yields have been higher in the past because share price growth has outpaced dividend growth, but it is still substantial.

The M&G share price has increased by 54% in the last five years.

Asset management is a huge industry that will benefit from continued high demand in the coming decades.

With millions of customers, an established reputation and a sturdy brand, I believe M&G has a competitive advantage that can lend a hand it thrive.

One risk is turbulent markets that force policyholders to withdraw funds, hurting profits. However, if M&G asset managers perform well enough, I believe the risk should be manageable.