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The Self-Invested Personal Pension (SIPP) is one of the best retirement preparation tools available to British investors. While taxes do eventually re-enter the picture, the elimination of dividend and capital gains tax, along with income tax relief, drastically accelerates the wealth-building process. So much so that even when starting later at the age of 40, it enables investors to accumulate a substantial nest egg. Here’s how.
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.
Potential retirement wealth
Let’s assume an investor has just turned 40, is planning to retire at 65, and is currently in the Basic income tax bracket, paying a rate of 20%. Depositing £500 into a SIPP entitles them to 20% tax relief, transforming this monthly lump sum into £625. And investing this capital at the average stock market return of 8% a year for 25 years, compounds into a £594,392 pension portfolio.
Looking at the latest data from the Office for National Statistics, that’s just over four times what the average 65-year-old has saved up in 2025. And when following the 4% withdrawal rule, it’s enough to generate a retirement income of £23,775 a year.
Combining with the extra £11,973 from the UK State Pension, this simple investing strategy would put someone on the path to having a £35,748 passive income. And according to the Pensions and Lifetime Savings Association, that’s just over the £31,700 threshold needed to enjoy a moderate retirement in 2025.
Yet, when factoring in inflation, that threshold’s bound to rise over the next 25 years. Therefore, investors may need to aim a bit higher.
Boosting returns
Rather than relying on an index fund to replicate the stock market’s average performance, investors can target more substantial returns by picking individual stocks. This obviously comes with a significant higher risk and requires far more financial and emotional discipline. But it also opens the door to a potentially far more impressive nest egg.
Take Domino’s Pizza Group (LSE:DOM) as an example. Over the last 25 years, the franchise pizza chain proved to be a major market beater. And even after the stock’s recent slide, the stock’s still up a staggering 3,712% when counting dividends. That’s the equivalent of 15.7% a year, enough to transform a £625 monthly investment into £2.3m!
Still worth considering?
The Domino’s share price dropped by almost 20% on its latest interim results, due to an unexpected 31.8% drop in pre-tax profits. The problem doesn’t stem from a lack of demand, given that system sales were actually up slightly during the period. Instead, this comes as a result of margin pressure from rising input costs as well as the increase in the National Minimum Wage.
This performance is undoubtedly frustrating. However, it’s worth pointing out that despite the headwinds, Domino’s is proving to be far more resilient compared to its leading competitors like Pizza Hut and Papa John’s in the UK. In fact, the group’s market share’s actually expanding, now controlling 53.7% of the UK pizza market.
Over the next three years, analyst projections suggest that the UK hospitality sector is on track for steady growth. And this recent expansion of market share nicely positions Domino’s to capitalise on this medium-term tailwind. As such, investors looking to build a custom retirement portfolio may want to consider digging a little deeper.
