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A Self-Invested Personal Pension (SIPP) is one of the most powerful retirement wealth-building tools in a UK investor’s arsenal. And its importance has only increased following the investment tax hikes in the latest Autumn Budget.
Don’t forget that any capital gains or dividends earned inside a SIPP are entirely tax-free. And whenever money’s deposited, there’s also tax relief from the government, transforming a £500 lump sum into £625 automatically for those in the Basic income tax bracket.
But how much wealth can this tool really generate? Let’s find out.
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.
The power of compounding
By investing in a low-cost index tracker fund, it’s reasonable to expect to earn around 8% a year. While there are never any guarantees, that’s roughly what the UK stock market has generated over the long run. So let’s assume that will continue being the case moving forward.
Now the question becomes, what’s the time horizon? If the goal is to retire at the age of 65, that means a 50-year-old has another 15 years ahead of them, a 40-year-old has 25, and a 30-year-old has a massive 35 years of compounding to capitalise on. And investing £625 a month in a SIPP at 8% for these durations can lead to life-changing results, even when starting from scratch.
For the 50-year-old, it translates into having an extra £216,274 in the bank. For the 40-year-old, the additional decade of compounding grows this nest egg into a far more impressive £549,392. But someone starting their SIPP investing journey as early as 30 could go on to have a staggering £1,433,677.
Getting even more ambitious
It’s important to recognise that a poorly-built portfolio can actually end up destroying wealth rather than creating it. But for those with the skill, stock picking can put compounding into overdrive.
Perhaps a perfect example of this in action over the last decade is Diploma (LSE:DPLM). Since December 2015, the specialist distribution enterprise has grown its market cap by 624%. But shareholders who reinvested dividends paid along the way have gone on to earn closer to 773%.
That’s the equivalent of 24.2% total return a year. And investors who have been drip feeding £625 a month into Diploma shares since 2015 have already accumulated just shy of £310,000.
Still worth considering?
After such impressive growth, Diploma’s now a £7.4bn enterprise. As such, it’s unlikely to continue to deliver 24% annualised returns over the next decade and beyond. But that doesn’t mean the business can’t continue to outperform.
With the industrials industry investing heavily into automation and the aerospace after-market services sector similarly ramping up, demand for Diploma’s controls and seals has followed along.
These structural tailwinds have already begun materialising in the group’s financials. Looking at its latest results, revenue in its 2025 fiscal year (ending in September) has jumped by 12%. But thanks to margin expansion, underlying operating profits are charging ahead by 20%!
That’s obviously encouraging. But it’s important to remember that both industrials and aerospace are cyclical sectors. And should manufacturing activity contract, or aircraft manufacturers fall behind schedule, these tailwinds could transform into headwinds for Diploma’s various businesses.
Nevertheless, with a stellar track record of outperformance and navigating cyclical shifts, Diploma shares could be worth researching for a long-term SIPP portfolio, in my opinion.
