How I’d target a £3m portfolio with compound interest in a SIPP

How I’d target a £3m portfolio with compound interest in a SIPP

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According to Hargreaves Lansdown (LSE:HL.), there are currently around 3,200 SIPP millionaires in the UK today. And with the government abolishing the £1,073,100 lifetime allowance in April, many of these individuals are set to continue pushing their wealth even higher.

Clearly, they’re doing something right. So let’s take a closer look at how the compounding process has enabled this success. And, more importantly, let’s explore how investors today can achieve the same status later down the line.

Investing for the long run

The data provided by Hargreaves reveals a consistent theme. The majority of SIPP millionaires achieved their wealth through long-term investments in quality businesses rather than get-rich-quick-style penny stocks. Or at least, that’s what the median age of 62 would suggest.

By consistently drip feeding capital into a portfolio each month, compounding can work its magic. And over long periods that can add up to a substantial sum, even when sticking to passive index funds.

For example, let’s say an investor is in the basic rate income tax bracket, paying 20%. Thanks to the tax relief benefits of the SIPP, a £500 monthly investment would automatically be topped up to £625.

Meanwhile, the FTSE 250 has historically delivered an average annualised return of 11% since its inception. And assuming this rate of return continues for the next 35 years, compounding would push the pension pot to be worth just over £3m!

What’s more, this figure could grow even higher if investors decided to pick stocks directly rather than relying on a passive investing approach.

Risk and return

As fantastic as it would be to have £3m in the bank for retirement, this figure needs to be taken with a healthy dose of scepticism. For starters, there’s no guarantee the FTSE 250 will continue to deliver its historical average returns. And even if it does, all it takes is one badly-timed market crash or correction to derail a portfolio, albeit likely temporarily.

This is where picking stocks can provide a solution. There’s no denying it comes with a significantly higher level of risk and volatility. However, sucessfully identifying winning businesses to buy and hold for the long run can drastically improve portfolio returns. And an investor able to reap an average annualised gain of 13% may end up sitting on a pension pot worth over £5m!

Of course, the question now becomes, which stocks should investors buy? Hargreaves Lansdown is certainly a popular pick at the moment, especially considering the financial services group has seen an uptick in client accounts.

The introduction of new products like cash savings ISAs has helped bring in 20,000 new customers, elevating the group’s assets under management by 6% to £142bn.

On the other hand, the firm is also at the mercy of the macroeconomic landscape, as weak sentiment puts a damper on trading activities on which the group collects commissions.

Like any investment, there are always risks as well as rewards. And it’s up to investors to decide whether it’s a move worth taking, or looking elsewhere for opportunities.

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