A SIPP is a Self Invested Personal Pension, and it gives people greater control and flexibility over their retirement savings compared to traditional pension plans.
It works in the same way as my Stocks and Shares ISA portfolio, with a few exceptions. Another is that donations are tax-free, with the government adding £20 to every £80 donated by a basic rate taxpayer. Higher and additional rate taxpayers can claim additional tax relief on their tax returns.
So, how can £240 a month turn into a £10m retirement portfolio?
However, I doubt my portfolio will ever reach £10m, but my daughter's power. Many Brits don't know they can open a SIPP for their children and if the SIPP has to grow over a long period of time, it can be huge.
Let's take a closer look.
Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
The process
Opening a SIPP for my daughter was easy. I use the Hargreaves Lansdowne platform, where I also have my daughter's tax-free ISA and my portfolio.
You can pay a maximum of £2,880 a year on this, which is £3,600 with 20% tax relief.
So, we simply contribute £240 every month to his SIPP, and this is topped up automatically – with some delay – through government tax relief.
Since then, I choose investments as I would anywhere else in my portfolio.
Planting the right
My daughter's SIPP is smaller than her ISA and my ISA, and we're talking a lot longer – as it stands, she won't be able to draw down her SIPP for 56 years.
Therefore, I have been allocating funds to ETFs, trusts, and funds, where we can get a certain level of diversification, but also focus on the growth areas of the market.
The first investment I made was FTSE 100's Scottish Mortgage Investment Trust (LSE:SMT) — A UK-listed investment trust that invests primarily in growth-oriented industries such as information technology and logistics.
Over the past 10 years, the stock has returned approximately 14.35% annually.
So, let's assume that I target and achieve 10% annual growth in my daughter's SIPP. How could it grow?
As the graph shows, the SIPP will see dramatic growth as it compounds, reaching over £10m in year 57. This really highlights the power of integration and the value of an early start.
Why Scottish Mortgage?
So, why was Scottish Mortgage my first investment? Although the trust's shares have fallen by around 40% over the past few years, the long-term trajectory remains impressive.
The share price of the fund reflects the value of the companies in which we invest. Most of its assets are listed as ASML again Nvidiabut some are not listed like Space Exploration Technologies (SpaceX).
Interestingly, SpaceX is now its third largest space. Personally, I like to be exposed to a company that I can't invest in, but you have to remember that SpaceX's valuation is not determined by the market.
Likewise, from a risk perspective, we need to be aware that growth-oriented businesses can fail, and if they do, the trust's stock falls.
However, the Scottish Mortgage team has an excellent track record of picking the next big winners. That is why I support its success in the long run.
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