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When it comes to investing for retirement, a Self-Invested Personal Pension (SIPP) is one of the most powerful tools in a British investor’s arsenal. Apart from granting all the usual tax relief and deferral benefits that private pension schemes offer, SIPPs offer complete control over a pension portfolio.
But how much money do investors need to put aside to enjoy a comfortable retirement?
Reaching financial freedom
According to the Pensions and Lifetime Savings Association, retirees require an income of £43,100 a year to enjoy a comfortable retirement. That’s sufficient to cover holidays, birthday presents, a new car every five years, home remodelling, and, of course, general living expenses.
The British State Pension will undoubtedly help towards this goal. Right now, someone earning the full State Pension is receiving £221.20 each week, or roughly £11,502.40 a year. However, for someone retiring in 30 years, the State Pension could be wildly different to today, potentially even smaller.
So let’s be on the safe side and plan for the entirety of retirement income coming from a SIPP. How large does it need to be? Around £1.1m when following the 4% drawdown rule.
Reaching a £1m pension pot
Building a SIPP worth £1.1m isn’t as impossible as it might seem. Assuming an investor receives 20% tax relief based on their income bracket, putting aside £500 each month would result in £625 of investment capital being available. And investing this at a 10% rate of return for 30 years would build a SIPP worth £1.4m – ahead of what’s needed today.
Sadly, due to inflation, £43,100 a year is likely not enough in the future. Assuming that inflation averages 2% over the next 30 years, investors could actually need closer to £78,100 to enjoy a comfortable retirement, or a £2m SIPP.
To achieve this without increasing capital contributions, investors will need to aim for a return greater than 10%. Fortunately, this is where stock picking provides a solution.
Take Games Workshop (LSE:GAW) for example. The Warhammer creator has proven itself to be a remarkable business designing high-quality plastic miniatures for hobbyists to battle with across the tabletop in addictive games. So much so that it now commands incredible pricing power over its products that remain in high demand, even during the ongoing cost-of-living crisis.
Subsequently, over the last 30 years, investors who bought and held onto Games Workshop shares have earned an average annualised return of 16.3%. And at this pace, a SIPP could reach the £2m target, not in 30 years, but in 24.
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.
Risks and rewards
Games Workshop’s stellar track record should be celebrated. However, whether it can maintain double-digit gains for new investors today is far from certain. After all, past performance doesn’t guarantee future results, and the business is significantly larger today.
There are also operational risks to consider. With manufacturing concentrated in Nottingham, exporting products to key markets like North America and Australia introduces a lot of logistical complexity. Even more so with tariffs being thrown around today.
So while Games Workshop may no longer be the millionaire-making stock it once was, studying its success could lead investors to discover new opportunities that might be.
