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Investing within your own investment personal pension (SIPP) is one of the most effective ways to build retirement assets. A regular savings plan combined with a healthy investment strategy is an important step to building a large nest egg. However, by taking advantage of the tax benefits of this special investment account, you can place the wealth building process on steroids.
So let’s break down how effective this strategy is, as a 50-year-old investor dumps £750 a month.
Calculate numbers
When it comes to investments, it is important to remember that there are no guarantees. However, a proper investment strategy can reasonably be expected to generate a return of around 8-10% per year. At least that’s something the entire stock market has historically provided.
Assuming a 50-year-old investor is aiming to retire at age 65, investing £750 a month at this rate would give you a portfolio of between £259,528 and £310,853. That’s not bad. But see what happens when you introduce SIPPS’ most powerful feature, Tax Relief.
The amount of relief received will vary depending on your income tax bracket. But let’s assume that investors are paying the basic tax rate. As a result, there is a 20% tax credit. That is, for every £750 added to SIPP, there is actually £937.50 worth of capital to invest. Considering that, investors’ nest eggs were able to surpass previous figures, reaching 388,566 pounds from 324,410 pounds.
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.
Build a victory strategy
As mentioned before, the success of an investment portfolio is heavily dependent on the success of your strategy. Even badly built or badly managed portfolios can generate returns that are unable to reach the 8-10% target. In some cases, a portfolio can even generate losses that result in the destruction of wealth rather than its creation.
Finding the top stocks to buy can be a challenging task. Even if a strong business is discovered at a reasonable price, it could still be a poor investment, depending on the investor’s goals and risk tolerance. Looking at my own SIPP, the strategy I chose focuses on dividend growth opportunities. Safe Store Holdings (LSE: Safe).
Self-storage companies are currently enduring unfavourable market conditions that impose growth. This has led to a rather disappointing stock price performance in recent years. However, with such a very high cash generation business, management positions themselves to expand internationally and thrive for the ultimate market recovery.
This is not the first time Safestore has navigated macroeconomic headwinds. And finally, careful capital allocation decisions have brought a 15-year dividend hike and a robust price-earnings ratio to a total of 677%. This is an annual return rate of 14.6%, which is firmly ahead of the stock market average.
At this rate, a monthly investment of £750 in SIPP could turn into a massive £602,410 nest egg after tax cuts! Of course, there is no guarantee of repeat performance over the next 15 years. And for investors looking to capitalize on growth rather than income opportunities, a safe store can be bad.
At the same time, today’s self-storage industry is far more competitive and creates additional challenges for management to overcome. Nevertheless, this is a business I think deserves a close look at, to search for dividends for SIPP investors.