If you put £500 per month into a SIPP, here’s how much money you could have by retirement

Contributing to a Self-Invested Personal Pension (SIPP) is one of the best ways to build wealth for retirement in the UK. With these accounts, contributions come with tax relief and your savings can grow free of tax.

Here, we’re going to look at how SIPPs work and highlight their advantages. We’ll also look at how much money one could potentially build up for retirement with one of these investment accounts.

SIPPs explained

A SIPP is a tax-efficient retirement account that allows you to control your pension savings. With this type of pension, you can choose exactly how your money is invested.

SIPPs are quite similar to personal pensions, which are offered by investment management companies. However, they generally offer more investment options than personal pensions.

SIPP benefits

From a retirement saving perspective, SIPPs offer several advantages.

For a start, most SIPPs enable you to invest in a wide range of growth assets including UK and international shares, investment funds, investment trusts, and exchange-traded funds (ETFs). With these types of assets, it’s possible to generate high returns on your money over the long term.

Secondly, investment gains and income are not subject to tax. So, your money can grow free of tax drag.

Third, contributions typically come with tax relief. This is essentially a reward from the government for saving retirement.

Currently, basic-rate taxpayers are entitled to 20% tax relief while higher-rate and additional-rate taxpayers can claim an extra 20% and 25% on top of this. So, for example, if a basic-rate taxpayer was to make a contribution of £800 to their SIPP, the government would add in another £200, taking the total contribution to £1,000.

Drawbacks

There are a few drawbacks to these accounts, however.

The main drawback is that your money is locked away until retirement. This is currently age 55 but set to rise to 57 in 2028.

Another issue to be aware of is that when you are able to access your SIPP savings, you can only access 25% tax-free. The rest is subject to Income Tax.

One other thing worth pointing out is that you are responsible for managing your retirement savings. If you make the wrong moves, results could be disappointing.

The returns on offer

With a SIPP, there’s no guaranteed or specific return on offer. Ultimately, the returns you generate will depend on your mix of investments.

However, with a solid investment strategy that encompasses multiple types of assets including international shares, it’s not unreasonable to expect a return of 8% per year over the long run. And with that kind of return, your money could grow substantially over time.

How much money can you build up for retirement?

Of course, the amount you can build up for retirement is going to depend on several factors including the age you start contributing at (the earlier the better), the amount you contribute, your investment returns, the tax relief you can claim, and the fees you are paying.

However, let’s say that a basic-rate taxpayer was putting in £500 per month, claiming 20% tax relief, and able to achieve a 7.5% return per year over the long run after fees. If they were to start contributing at 45, they could have around £325,000 for retirement by the age of 65. This would rise to around £500,000 if they were to start at 40, while it would fall to around £200,000 if they were to start at 50. These calculations highlight the importance of starting early.

Finding the best SIPP for you

It’s worth pointing out that not all SIPPs are created equal. Some have far more investment options than others. Meanwhile, some have lower fees than others. If you’re looking to compare SIPP providers and find an account that suits your needs, you can find plenty of information right here at Good Money Guide.