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The Self-Invested Personal Pension (SIPP) is one of the most powerful retirement wealth-building tools available. Yet, shockingly, more than a third of adults in the UK aged between 40 and 75 don’t use it or even have any retirement savings at all.
Even when looking exclusively at 50-year-olds, the numbers don’t get much better. But the good news is, there’s still plenty of time to build retirement wealth even with just £550 a month. Here’s how.
Earning £1,000 a month passively
The UK State Pension’s currently £230.25 a week, which works out to just shy of £12,000 a year. Alone, that’s barely enough to get by. But throw in another £12,000 from a retirement portfolio and things get a bit easier.
To earn that extra £12,000, the 4% withdrawal rule shows that a portfolio needs to be worth at least £300,000. Obviously, that’s not pocket change. But with a time horizon of 17 years, a 50-year-old investor can just about make it when using a SIPP.
Don’t forget, SIPPs provide income tax relief. So for someone paying the 20% basic rate, whenever money is put into a SIPP, they receive that 20% back from the government. As such, a £550 deposit becomes £687.50 of capital. And investing this money each month at the stock market average of 8% for 17 years translates into £296,860 – almost exactly on target.
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.
£12,000 isn’t enough
Having an extra £12,000 a year, when combined with the State Pension, can go a long way. Sadly, 17 years from now, due to inflation, it’s likely not going to be enough.
As such, rather than relying on index funds, my SIPP portfolio’s custom-built, containing only the best businesses, in my opinion. Why? Because while stock picking incurs greater risk, it opens the door to superior returns. And even if that means an extra 4% a year, that’s all it takes to turn that initial £296,860 into £454,650 – 53% more wealth.
Obviously, earning 12% a year is easier said than done. But one stock from my portfolio that could have this potential is Howden Joinery (LSE:HWDN).
The market leader
The fitted kitchen specialist is currently navigating a cyclical downturn within the UK home renovation market and these headwinds have caused growth to slow to a crawl.
But Howden’s proven to be quite resilient. In fact, management’s been capitalising on the struggles of its peers and has even been busy stealing market share. And at the same time, operational efficiency improvements across its depot network have translated into wider profit margins.
Yet neither of these achievements is being reflected in its financials… yet. Once the tide turns and economic conditions improve, the rebound in demand could see Howden’s revenue and profits surge – a tailwind I’m aiming to capitalise on.
When this expected rebound will occur is anyone’s best guess. And persistent economic weakness could eventually start to shake even Howden’s strong financial position.
Even if everything recovers as expected, its competitors, while smaller, are still a credible threat, especially if they come out with novel designs that outshine Howden’s offerings. After all, consumer tastes are constantly changing.
Nevertheless, I remain cautiously optimistic. That’s why I think investors may want to take a closer look for their own SIPPs.