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It’s never too late to contribute to your own investment personal pension (SIPP). Even if you start contributing in your 50s or 60s, you can still build a significant amount of wealth to retire.
However, for those who began contributing to SIPP in their early 40s, the results can be pronounced (due to the power of compound interest). Here we look at what £500 invested in a month that could lead to age 40 and retirement.
Multiple benefits
From a wealth building perspective, SIPP offers several advantages. First of all, contributions involve tax cuts. This is essentially a government reward for saving for retirement.
For taxpayers with base interest rates, the relief offered is 20% (the higher is the higher for those earning more). This means that for every £80 donation, the government will add another £20, adding the total contribution to £100.
Please note that tax procedures depend on each client’s individual circumstances and may change in the future. The content in this article is for informational purposes only. It is not a form of tax advice or constitutes. Readers are responsible for carrying out their own due diligence and obtaining professional advice before making investment decisions.
Second, investments can be free from capital gains tax (CGT) and income tax. So, for example, if you generate a profit of £10,000 in a stock or fund, you won’t see that CGT will not be paid.
Third, SIPPS tends to provide access to a wide range of investments, including funds, ETFs, equities and mutual funds. These types of investments can generate revenue of 8% or more per year over the long term.
Achieve high returns
It is worth pointing out that high returns are not guaranteed. However, it is best to build a properly diversified portfolio to achieve attractive returns. Investors should also be patient and satisfied with short-term market fluctuations.
When it comes to building a portfolio, there are many different approaches you can acquire. Personally, I am a fan of combining funds (both active and passive) with individual stocks.
Sands are a great foundation for the SIPP portfolio as they typically provide access to a wide range of stocks. This keeps all investor eggs from entering one basket.
Individual stocks, on the other hand, offer higher earnings potential. take Amazon (NASDAQ:AMZN), for example. Over the past decade, its stock has risen from around $19 to $195. This leads to a return of around 26% per year.
There aren’t many funds that generated such profits for investors. If investors had put $10,000 in Amazon stocks 10 years ago, it would now be worth more than $100,000.
I think Amazon stocks are still worth considering as an investment today despite the huge profits over the past decade. In my opinion, the company has great long-term potential given its exposure to cloud computing and artificial intelligence (AI).
That said, there are many risks to consider, such as reducing consumer and business spending. Concerns about these risks can sometimes lead to stock price volatility.
£635k x 65?
Let’s say an investor has achieved a long-term return of 8% per year by mixing funds and individual stocks. If they start investing £500 a month at £40 and receive a 20% tax cut, then calculate about £535,000 by the age of 65.
If they could achieve a 9% return per year, they would reach around 635,000 pounds to 65. These numbers show what is possible by preserving early and put together a decent investment strategy.